The economic development of Guatemala : the report of a mission

• I BR D SPECIAL PUBLICATION Sales Number: I BR D. 1951.2 Price, U.S. $5.00 • •  • • • •  The Economic Development of REPORT OF A MISSION sponsored by the INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT in collaboration with THE GovERNMENT oF GuATEMALA INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT WASlllNGTON, D. c. 1951  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT WASHINGTON 2!5, D, C. OFFICE OF THE PRESIDENT June 15, 1951 His Excellency Coronel Jacobo Arbenz Guzman President of the Republic of Guatemala Guatemala City, Guatemala, CA My dear Mr. President: I take pleasure in transmitting to you herewith the Report of the Mission to Guatemala, headed by Dr. G. E. Britnell, which was organized last year under the sponsorship of the International Bank for Reconstruction and Development in cooperation with the Government of Guatemala. In the opinion of the International Bank, the Report provides an objective analysis of the potentialities and prob- lems in the economic development of Guatemala. The Bank has not had the opportunity to consider fully the many recom- mendations contained in the Report and, therefore, these should be regarded as suggestions for consideration by your Government rather than as positive recommendations of the Bank. Nevertheless, we believe that the analyses and recom- mendations made by the Mission deserve the most careful consideration by the Government and people of Guatemala. The conclusions of the Mission will be fully effective only if they serve as a basis and a guide in the preparation, by the Guatemalan authorities themselves, of a sound, integrated, and well balanced development program. We share the hope expressed by Dr. Britnell in his letter of transmittal that the Report will be widely studied and discussed from an objective, nonpolitical viewpoint, so that V its major implications may be fully understood and so that actions based on it can enlist broad support from the Guate:.. malan people. Only with such full understanding and support can the Mission's recommendations be tranlated into a Guate- malan national development program. The Bank is prepared to provide or to arrange for such other assis'tance as the Gov- ernment might need or wish in studying the Report and work- ing out a development program. The Bank will be greatly interested to follow the progress · made in Guatemala to promote understanding and expedite application of the measures recommended by the Mission. It is our intention to undertake simultaneously a complete study of the Report so that we will be in a position at the appropriate time to discuss with your Government a development program which you may decide to carry out and also to consider pos- sible ways in which the Bank can help in the realization of the program through technical and financial assistance or by other means. It is my sincere hope that this Report may be of positive and lasting benefit to the Republic of Guatemala. Sincerely yours, Eugene R. Black vi  UNIVERSITY OF SASKATCHEWAN SASKATOON, SASKATCHEWAN, CANADA DEPARTMENT OF ECONOMIC• AND POLITICAL SCIENCE June · 15, 1951 Mr. Eugene R. Black President International Bank for Reconstruction and Development Washington, D. C. Dear Mr. Black: I take pleasure in submitting herewith the Report of the Economic Survey Mission to Guatemala sponsored by the International Bank for Reconstruction and Development in collaboration with the Government of Guatemala. This Report is based on studies made by the Mission in Guatemala and includes specific analyses of certain fields such as agriculture, industry, mining, transportation, communications and power. A separate summary outlines the major conclusions and recommendations of the Mission. The main Report contains more detailed analyses as well as supporting factual material. I should like, on behalf of the Mission, to record our appreciation of the assistance we received from so many sources to facilitate our work in Guatemala. President Juan Jose Arevalo and a number of his Ministers showed a sustained interest in the work of the Mission. Our hosts in th.e lnstituto de Fomento de la Producci6n, from the President of the Executive Board, Ingeniero Juan Angel Nunez Aguilar, and the General Manager of the Institute, Lie .. Carlos Leonidas Acevedo, to the most modest working levels, left nothing undone to help the Mission carry out its work successfully. The physical arrangements provided by INFOP were admirable, and the cordiality we encountered vu everywhere was most gratifying. In particular, I should like to express our thanks to the Executive Board, the Technical Council, and the staff of INFOP for their splendid cooperation. Dr. Eduardo Montealegre, Manager of the Department of Fomento, and his successor, Dr. Gabriel Orellana, gave us untiring assistance without which the basic material required for this Report could not have been assembled. The Bank of Guatemala also rendered invaluable help. We are deeply indebted to Dr. Noriega Morales and his compe- tent staff, both for their collab'oration and for the wealth of economic information furnished by t'hem. I regret that I cannot list by name the scores of officials and private citizens in all wa1ks of life, as well as the many non-Guatemalans, who offered so generously of their time and knowledge in answering our innumerable questions. I am most g¥,teful to the individual members of the Mis- sion for the enthusiasm, enterprise and cooperation which they brought to their tasks. I particularly wish to express my appreciation to Mr. Georges de Fleurieu, Senior Economist of the Bank, who, following the return of the Mission, carried a double burden in working on the Report as well as perform- ing his regular duties. Dr. Francis Godwin was of invaluable assistance in editing the Report. In studying the Report and in carrying out its recommenda- tions, the Guatemalan authorities will undoubtedly be able to elaborate our findings and to extend them to other fields. I am sure I speak on behalf of the entire Mission in expressing the hope that our Report will contribute, in some measure at least, to the further development of the Guatemalan economy and to' the improvement of the living standards of the Guate- malan people. Sincerely yours, S.~ -...__ Chief of Mission Vlll  THE MISSION • GEORGE E. BRITNELL, M.A., PH. D., F.R.S.C. Head, Department of Economics and Political Science, University of Saskatchewan Chief of Mission RALPH H. ALLEE, M.S., PH. D. ................... ... Adviser on Agriculture Director, Inter-American Institute of Agricultural Science, Turrialba, Costa Rica RICHARD F. BEHRENDT, DR. RER. PoL. ... .... ..... Economist Director of Research, Economic Development Ad- ministration, Government of Puerto Rico (formerly Professor of International Affairs, Col- gate University) GEORGES DE FLEURIEU, D.F.S. ..... .. ... ... Economist International Bank for Reconstruction and Development FEDERICO CoNsoLO, M.A., D. Sc ... .... Liaison Officer International Bank for Reconstruction and Development MAJ. GEN. EDMUND H. LEAVEY, U.S.A., C.E. Adviser on Transporta- Transportation Consultant (Recalled to active duty) tion and Communica- tions JULIO 0. MORALES, M.S., PH. D. ··· ······· ······ ···· Assistant Adviser on Inter-American Institute of Agricultural Science Agriculture ALBERT 0 . RHOAD, M.S . ... ......... ..... ..... ........... .. Assistant Adviser on Inter-American Institute of Agricultural Scie11ce Agriculture J. STUART SNEDDON, S.B . .... .. .. .. .. .. ... ... ... .... .... ... Adviser ,on Industry, Industrial Consultant Mining and Power VIVIAN C. OLD Secretary lX • •  Introduction The original discussions between the Guatemalan Govern- ment and the International Bank for Reconstruction and Development on the subject of technical assistance took place at the end of 1948, when Mr. John J. McCloy, then President of the Bank, visited Guatemala. About one year later, on January 11, 1950, the Guatemalan Government formally re- quested that the Bank organize an Economic Survey Mission to the Republic, composed of experts in various fields but excluding specialists in finance, balance of payments, exchange control, and public health. The Bank's acceptance of this request was transmitted by Mr. Robert L. Garner, Vice Presi- dent of the Bank, in a letter of February 10, 1950, which stated in part: "The purpose of such a Mission, as I see it, would be to make a survey of Guatemala's potentialities for development, in order to enable the Bank to make recom- mendations with respect to the general directions in which such development could be most fruitfully under- taken and the conditions required for its success. Among other things, these recommendations would be concerned with the appropriate scale, timing and order of priority of investment in the various fields of devel- opment, considering the financial resources of the coun- try and its capacity to assume new foreign obligations. The Mission's survey would also serve as a basis for the Bank to determine the extent and purposes of the financial assistance which it may be able to render to Guatemala's development. "I do not believe that this Mission should undertake detailed technical planning of specific projects; such work would more properly follow its analysis and recommendations as to the general fields of development to be emphasized and the priorities to be signed. I sug- gest, therefore, that the Mission should be composed of a small number of consultants of high caliber, each of whom would be competent to appraise development Xl  possibilities in a major sector of the economy, rather than more numerous narrowly specialized experts." The Mission-, which departed for Guatemala on June 13, 1950, consisted of six full-time members whose combined fields of specialization included agriculture, industry, mining, trans- portation, power and economics. This group was assisted in the field by a number of additional specialists for varying periods of time. Studies within Guatemala were completed in the latter part of August, 1950, and were followed by analy- sis of data and preparation of the Mission's report in Wash- ington, D. C. As presented herewith, the Report is divided into ten chap- ters. The first of these analyzes certain general aspects of the Guatemalan economy and its fundamental problems. The six succeeding chapters examine in greater detail the problems in agriculture, industry, mining, transportation, telecommuni- cations, and power. An eighth chapter deals with public poli- cies affecting development. The ninth chapter is an appraisal of the financial resources available to Guatemala for carrying out its development program, and the tenth or concluding chapter offers some alternative broad national programs of public investment which appear practicable under varying circumstances. XU  TABLE OF CONTENTS Chapter Page INTRODUCTION ..... . Xl I. OUTLINE OF THE GUATEMALAN ECONOMY ....... . ... ......... 3 The Land .. .......... ...... .... ......... ....... ...... ........ .... ..... .... .. 3 The People . . . .... .... ............ . ..... ... ..... ..... ..... ... . 6 National Income .. .... .. ........... ...... ....... ......... ... ... .......... 10 Foreign Trade ....... . . ... . . ....... .. .......... ... . .. .. ..... 11 Balance of Payments .............................. ............... ....... 14 The Monetary and Banking System ........... . ............. 14 II. AGRICULTURE AND THE RURAL ECONOMY . ... ..... .......... . 22 I. AN INVENTORY . ...... ·· ··· ... ......... .................. ........ . 22 Basic Resources .. 22 Production .... 23 Practices and Problems ...... ......................... .... 25 II. POLI CIES FOR PROGRESS ....... ... . . ... ... .. . 27 Two Concurrent Programs .... ..... ........... 27 Coordination ... ..................................... 29 A~ricultural Research, Extension and Train- mg ........ ... ..... 31 State-Owned and State-Administered Farms 36 III. FIELDS FOR EARLY DEVELOPMENT .... . ... .... ....... . 40 Coffee ................. .................. ....... ......... ... .. 40 Selected Crops ... .. ... ... .. ................. ...... .. .. 44 Mechanization ... .. .... ............ ... ........ ... .......... .... . 54 Marketing ...... ... .'....... .... ... ....... ........ . 57 Agricultural Credit .... ..... .. ..... ........... ..... ...... ... . 59 Livestock .... .... ........... ... ......... ..... ........ ........... ... 61 Forest Products ....... .... .. .......... ... ..... ..... ... .. ... ... . 67 Irrigation ... 71 IV. A LONG-RUN PROGRAM ....... .... . .... .. . ... . .... ... .. . .. . .. 74 Rural Development .... .. .......... .. .... ........ ...... ... 74 Resettlement on the Pacific Coast.... ..... ........... 81 Colonization of Other Areas .............. ............. 84 V. PRIORITIES AND EXPENDITURES .... .. ...... . ... .. ..... . . 88 Xlll Chapter Page III. INDUSTRY .... .. ... ... .. .. .. ... .... ....... ... .... . .... ....... ....... ... ... ... . ... .. 91 I. GUATEMALAN INDUSTRY TODAY ... . ....... .... . . ... ... . 91 II. FACTORS INFLUENCING INDUSTRIAL DEVELOP- MENT ..... ... .. .... ...... ... . .. ..... .. . ... ............. .. ... .. ... 94 Raw Materials .... ..... ...... ........ ...... .. .. .. ...... ... .... .. 94 Labor ..... .......... .......... ... .. ............. .................. .. 95 Technology .......... .... ... .............. .... .... ... ....... ... .... 96 Management ............ .......................................... 96 Capital and Credit.... ....... .. ... ... ........ ... .. .... .. ..... . 97 Transportation . ..... ...... .. ........ ............. .... ... .... ... 98 Government Controls ............ .......................... 98 Markets ....................... ....... .. ....... .............. ...... 99 III. POTENTIALITIES OF SELECTED INDUSTRIES ........ 100 Beverages ...................................................... .... 100 Sugar ............... ............. ..... ........ ................. .... .. 101 Flour ..... .. .. ...... .... .... .... ......... ... .. .. ......... ..... ........ 103 Fish .......... ..... .......... .................................. .... ... 104 Other Food Products......... ...................... ...... .. . 105 Textiles ..... .. ..... ........ ..... ........ ......... ....... ... ........ 106 Shoes and Leather Goods.... ..... ...... ....... ..... ..... 108 Hard Fiber Products... ...... ..... ......... .. .. ............ . 110 Cement ...... .. ..... ..... .... .... ... .. ....... .... .. ... ........... .... 111 Wood Products ... .. .......... ..... ........................ .. .. 112 Paper .......... .. ...... ... .................. ..... 113 Chemicals and Drugs. . .. ........ .................. 113 Miscellaneous Industrial Products.... ..... ... ...... 114 IV. RECOMMENDED POLICIES ···· · · ··· ·· ·· · ···· ·· ·· ·· ···· ··· ···· 116 l V. MINING AND PETROLEUM .. ....... .. ........... .... ...... .. ...... ....... 121 I. STATUS OF DEVELOPMENT ... ... ... ········ ···· ··· · ··· ······· ·121 Historical Background ........ ......... .. ..... ... .... .... 121 · Present Mineral Production... ............ ..... ........ 122 II. FACTORS AFFECTING MINING DEVELOPMENT .. . . 124 Technical Information .. ..... ..... ... ...... ........ .... ... 124 Markets .... .. 124 Transportation ...................... ..... ....... ............ ... . 125 Production Costs ......... ..... ......... .. ........ .... ........ . 125 Legislation .. ... ........... ........ .... ......... ......... ......... . 126 III. RECO M MENDATIONS 129 xiv Chapter Page V. TRANSPORTATION .... .. ... .. ........... .. ....... ..... 132 I. SURVEY OF EXISTING CONDITIONS......... ....... .. . . 132 II. BASIC FACTORS AFFECTING DEVELOPMENT OF TRANSPORTATION ...................................... .. 135 J II. GOVERNMENTAL POLICY ........ ... .................... . .. .. . . 141 IV. HIGHWAYS 151 V. RAILWAYS ................ .. ................ ..... . ....... . .......... .. 168 VI. PORTS AND WATERWAYS.. .......... .... .... . ...... .. ....... .. 180 VII. AIRWAYS ....................................................... . .. .... 194 VIII. PRIORITIES AND EXPENDITURES ...... .................... 199 VI. TELECOMMUNICATIONS .................. ..... ........ .... .... ... ........ . 211 l. INTERNATIONAL SERVICE ...... ... ........... . ....... . .. .... . 211 II. DOMESTIC SERVICE ..... ... ... . ......... ............ .... ... .. .... 212 Present Network .............. ...... ..... ,.. ... ............ ... 212 Local Telephone Systems ....................... .......... 212 Long Distance Service......... .. ................... .... .... 213 Telegraph ........... ..................... .... ... .. ..... ............ 214 Rates .. ..... ...... ........... .... .... ..... ........ .. ...... ........ ... .. 214 III. IMPROVEMENT ................ ... .. ............. .... ... .. ... ... ..... 21.i VII. POWER . ... . ... . . .. . . . . . . . .. .. . . . ... .. . . .. .. .. .. . .. . . .. . . . .. . .. . .. . . . . . . . . . . .. . . .. . . . .. 218 I. PRESENT POWER SITUATION .. ... ... .. .. .... ..... .... .. .. ... 218 Demand ........ ....................... ........ ...... ....... .... .... 218 Production ................. ....................................... 219 Transmission and Distribution.............. .. ........ 224 Rates ....... ......... .. ... ........ .... .. ... ....... .... ....... .. ........ 225 II. FACTORS INFLUENCING POWER DEVELOPMENT 227 Potential Power Sources ............ .. .~ .................. 227 Availability of Technical Data.... ................. ... 230 Specialized Personnel .. .. .. ... .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 230 Planning ..... ........... ..... .............. ...................... ... 231 III. RECOMMENDED POLICIES AND PROJECTS .. .... ... .. . 233 IV. PRIORITIES AND EXPENDITURES .. .. .. .. .. .. .. .. .. .. .. .. . 242 xv Chapter Page VIII. PUBLIC POLICIES AFFECTING DEVELOPMENT . ..... .... .. . .. . 244 Coordination of Effort ... ....... .............. ......... .. ...... ........ . 244 Controls and Restrictions ..... .. .. .~.. .... .... ... ..... ... .. .... . 249 Public Enterprise ..... .......... ..... ... ....... .... ..... ... ... .... .. ...... . 252 Labor Policies ........ ...... ................... .. ....... .. ...... .......... . 254 Health ..... ........ .. ..................... ............ ..... .... ........ ... ' .. .. .. 257 Public Administration ....... ...... ..... ..... ............ ........ .... .. . 262 IX. FINANCIAL RESOURCES AVAILABLE FOR INVESTMENT ... . 265 I. GENERAL OUTLOOK .. .. .... ..... ........ .. .. . ........ ........ . . . 265 II. CENTRAL BANK BORROWING ........ . .. .... . ...... ... .. .. 265 III. INTERNAL SOURCES OF EARLY PROMISE .......... . 267 Taxation ......... ... ......... ... ..... ........... .... .... .... ...... .. 267 Fincas N acionales 273 Government Economies .. ....... ........ .. .......... .... 274 IV. INTERNAL SOURCES OF MORE DISTANT PROMISE 275 Private Savings ... ...... ............... .... ......... .. ...... .. 275 Institutional Savings ..... ............. ... . .. ...... .... ... 276 Domestic Private Investment ............. ....... 278 The Government Bond Market ....................... 280 • V. 282 EXTERNAL SOURCES ······· ·· ······· ·· ···· · · ·· ··· ········ ··· ·· ·· Foreign Direct Investment .... .... ........... .... ..... . 282 International Credit ..... .... ...... ............... .. ...... .. 286 Grants and Direct Financial Aid ..... ..... .. ....... . 290 VI. CONCLUSIONS ............ .. .... ... ........ .. .. .. ..... .. ....... ... .. . . 290 X. THE RECOMMENDED INVESTMENT PROGRAM. .... .. .. . .... .. .. 293 I. AIMS AND ASSUMPTIONS . .... ..... .. ..................... ... 293 II. THE OPTI M UM INVESTMENT PROGRAM . ........... 296 III. THE REDUCED INVESTMENT PROGRAM .. .......... 300 IV. THE PAY-A s-You-Go PROGRAM ....... . .. ...... .. ...... 303 XVl  LIST OF TABLES Table Page I. Occupational Distribution of the Population ...... ... ....... . 9 II. Estimate of Gross National Product, 1947-48. .. 10 • III. Foreign Trade in Selected Years, 1927-49.... .. ............ .. 12 IV. Values of Principal Exports .. .. . .... .... .... ..... 12 V. Values of Principal Imports ...... .... ..... ..... . .. .. .... ... 13 VI. Main Items in the Balance of Payments, 1946-49... .. ..... 15 VII. Total Bank Deposits (Outside of the Banco de Guate- mala) as of March 31, 1950............ .... ... ... .. ....... .. .. ..... 18 VIII. Gold and Foreign Exchange Reserves, 1946-50... ... .. .... 19 IX. Tax Receipts and Expenditures, 1949.... ......... ......... ...... 20 X. Budget Deficits, 1947-48 to 1949-50 ............... .. 21 XI. Estimate.cl Output of Principal Agricultural Products, 1947-48 ···· ···· ·· ··· ···· ··· ·· ········ ·· ···· ···· ······· ··· ·· ······ ··············· · 24 XII. Production and Disposition of Coffee, 1936-37 to 1948-49 ·········· ·· ········ ··· ······ ········ ··· ····· · 41 XIII. Banana Exports, 1939-49... .. ........ ............ .. ...... .... .. .. ... ... . 49 XIV. Abaca Production Since Inception, 1945-51.... ....... .. ....... SO XV. Consumption of Livestock, 1938-49. ... .... ... ......... ....... ..... 62 XVI. Proposed Additional Expenditures on Agriculture First Year ................. ............................. ....................... 90 Second Year .......................................... .. ................... .. 90 XVII. Values of Manufactures and Raw Materials Consumed, 1948 ······························· ·········· ···· ······· ·· ······· ·············· ·· ··· 93 XVIII. Comparative Production of Selected Industries in Recent Years ................ ................ ... ...................... ...... 94 XIX. Volume and Value of Mining Output, 1949. .... ......... ..... 123 XX. Estimated Costs of Proposed Highway Development Program ..... .. .... ....... ... ... ... ... .... ....... ..... ... ... ..... .... .. ... ... ... 162 XXI. Cargo Movement Through Puerto Barrios, 1938-48... . 183 XXII. Cargo Movement Through San Jose and Champerico, 1938-48 ............ ... ........ ...... ....... .. .................... ........ .. ..... 192 XVll Table Page XXIII. Traffic Operations of Aviateca, 1944-50. ...... ... ......... ..... .. 195 XXIV. Income of Aviateca, 1946-49.. .. ..... ....... ... ...... ...... .... ... ...... 196 XXV. Suggested Order of Priority for Work Projects.. ... ... .... 210 XXVI. Domestic Telephone Rates for Various Classes, of Service .... .. .... ....... .. .................. ...................... .......... .. ..... 214 XXVII. Principal Power Plants, 1950 .... .. ........ .... ......... .... ....... ... 220 XXVIII. Customers and Connected Load of Empresa Electrica de Guatemala, 1950.. .... .. .. .. .. .. .. .... ... ... ... .... ....... ......... ... .. 221 XXIX. Energy Furnished by Planta N acional de Santa Maria, First Ten Months of 1949..... ....... .... .. .......................... 222 XXX. Selected Average Rates for Electric Service in Various Localities, 1950 .......... ............ ......... .. ........ ........... .......... 226 XXXI. Hydroelectric Sites Reported from Various Sources, 1950 ······· ···· ···· ··· ·········· ····· ······· ··· ········ ············· ····· ····· ··· ··· 228 XXXII. Investments of Banco de Guatemala, as of May 31, 1950 ···················· ·· ··········· ··············· ··········· ··· ···· ·· ··· ······ ·· · 266 XXXIII. Assumption No. 1: Optimum Investment Program .. .. 297 XXXIV. Assumption No. 2: The Reduced Program ..... .. .. ....... 301 XXXV. Assumption No. 3 : The Pay-As-You-Go Program.... 304 MAPS I. Topographical Regions ....... ............ .... ......... before page 5 II. Population Distribution ....................... ... .... " " 7 III. Agriculture and Land Use.......................... " " 25 IV. Recommended Basic Highway Network ... " " 157 V. Railways ...... ...... ........................ .. ... ..... .. ... ... .. " " 169 VI. Recommended Waterway Service-El Estor to Puerto Barrios ...... .. ..... ..... . " " 189 xviii The Economic Development of Guatemala  CHAPTER I Outline of the Guatemalan Economy It must be apparent to the most casual observer that Guatemala possesses natural advantages which, if properly utilized, should make it possible for the Republic to achieve a relatively favorable position among the nations of the Americas both in living standards and in financial stability.• Yet actual economic development down to the middle of this century has barely scratched the surface of these latent pos- sibilities. • • Behind this paradox lies the unusual nature of Guatemala's endowment. Geological history has given this mountainous, tropical country extremely fertile, volcanic soils and a range of altitudes which offers a wide variety of climates. Yet, by the same token, the rugged and broken topography has ham- pered transport and created such obstacles to all types of development that potentially productive areas still remain relatively inaccessible. These same factors tend to perpetuate the cultural isolation which continues to characterize large segments of the rural population of the Republic. 1. THE LAND Mountains divide the country into a number of fairly dis- tinct regions. A short distance inland from the 200-mile Pacific coast line the Cordillera of the Andes, the Sierra Madre, traverses the Republic from border to border. From this back- bone other ranges extend as spurs, chiefly toward the Carib- bean side where they descend gradually to the sea. Regions Along the south side of the Sierra Madre is the low Pacific coastal plain - a narrow strip from 20 to 40 miles in width, malarial, but by far the most promising agricultural area in Guatemala. At present, except for the Port of San Jose and the operations of a United Fruit Company subsidiary at Tiquisate, the region is only sparsely populated. 3  4 THE ECONOMIC DEVELOPMENT OF GUATEMALA Above this tierra caliente, on the mountain slopes and foot- hills in altitudes of from 300 to 4,500 feet, lies the Pacific pied- mont region. Here are good cattle ranches and plantations of sugar cane, rice and other tropical crops. Above 1,500 feet, in the rich, volcanic soil, coffee cultivation predominates. Beyond is the Sierra Madre, with several peaks higher than 12,000 feet and numerous volcanoes at present mostly inactive. In and around these mountains are fertile valleys, filled with • soil eroded from the mountain tops. These make up the high- lands. Because of the excellent climate and soils most of the population is concentrated in this zone. The activity is largely subsistence agriculture, mainly corn and beans, with forest and some pastures in the higher altit~des. • North and eastward of the highlands the land slopes off gradually. The region is thickly interspersed with mountain ranges and deep valleys, down which major rivers flow toward the Caribbean. Much of the area is relatively undeveloped; but around Cob.in -almost in the center of the Republic - there are coffee plantations and promising mining develop- ments. On the Caribbean side is another tropical lowland, includ- ing the Lake Izabal region and the lower valleys of the Motagua and Polochic Rivers. Here, in fertile soils, were established Guatemala's first large banana plantations, now partly replaced by abaca because of the spread of banana diseases. To the north lies the plain of the Peten, similar to the Mexican lowlands of the Yucatan Peninsula. Remains of the once populous Mayan civilization in this area still exist, covered with matted jungle. Now the region is only thinly settled and produces only chicle and tropical woods. Climate Throughout the Republic the climate varies with the alti- tude. Both coastal lowlands are hot . and humid the year around, but on the interior plateaus where elevation ranges from 1,500 to 4,500 feet the climate is equable and healthy; in still higher regions the temperature is cool.  Map I Topographical Regions M E j jt P,tln ind C1ribb1•n Low/1nds B12 C1ntr1/ Hi.9hl1nds - 3 Cud,ummn,s P1r1mo ind Hit1h Mi,untl,in Pul<s °G. t1e ™-ISoutnu.surn Yilltys, Pl1ins, ,,,./ Ahunt.ins --18 [II]]]s CcWn ,nd Zen• Rem, H,J/s ind Yall'!)'s .IIlill1Illil 6 W,.st,m Huehuet,111n.90 H,l/s ind Yall'!)'S ~ 7 Vl'fWr l'acif'ic Pi~dmont ~ 8 LowerP..cif'ic PiMmcnt t-:-:-.::_:js P1dl't't: C08St1/ Pl,in --IS AREAS OF THE REGIONS AND PERCENTAGES OF TOTAL AREA HONDURAS REGION I 50,277 SO . KM., 46 . 0": REGION 2 . 20,072 SQ . KM .. I 8. 4°": REGION 3 • 1,423 so.KM .. 3. 3": REGION 4 . 14,904 SO . KM., 7. 3": ...... - · -., REGION 5 6,200 SO.KM., 5. 7", · - "'··,.. "\ .. REGION 6 • l,583SO.KM., I . 4" : REGION 7 . 4,217 SO.KM., 2. 3": 14-- ' _. I __ ·· ~14 REGION a • 3,715 SQ.KM., 3, 4": ~ L. ...,,·· REGION 9 6,731 SO . KM., t5. 2". SA L ScALE: I: 2,750,000 VA 0 50M1L£S D O R 0 SO K1U)METERS OUTLINE OF THE ECONOMY 5 Rainfall occurs mostly in the rainy season from May to November, and varies from place to place. The heaviest annual rainfall is found in the Caribbean coastal plain, which sometimes receives as much as 200 inches. On the Pacific side the annual total is less, diminishing toward the coast. Guatemala City, in the highlands, averages about 45 inches. Agricultural Potentialities In soils and climate, few countries are better equipped for agricultural development. The varied regional conditions pro- vide a place for almost every type of agriculture known in the Wes tern Hemisphere. The lower altitudes, well suited for tropical, mechanized cultivation, are now producing such crops as bananas, sugar cane, abaca, cotton, rice, essential oils, cacao and rubber. In the intermediate zones, between 1,000 and 5,000 feet above sea level, coffee cultivation repre- sents the main source of wealth and income. The staple foods, corn and beans, are grown everywhere, and favorable condi- tions exist on the Pacific coast for their intensive cultivation. Cattle exist or can be raised in most parts of the Republic. It is in her agriculture, particularly in coffee, cattle and low cost food crops, that Guatemala can find the most promising basis for future economic progress. Forests Forest resources are extensive. Out of a total land area of some 10.9 million hectares, about 7.2 million hectares ( or 65 percent) are in forests, composed of approximately six million hectares of hardwoods and 1.2 million of softwoods. There are some three hundred different species of trees, in- cluding tropical, subtropical and temperate varieties; among them are the finest cabinet woods, as well as many others used for building construction or millwork. In addition to lumber, the forests contain vanilla, sarsapa- rilla and many other kinds of medicinal barks and herbs, camphor, cinnamon, as well as oil-bearing palms. The man- grove yields tannin for leather manufacture, while other trees produce chicle, rubber and turpentine. 6 THE ECONOMIC DEVELOPMENT OF GUATEMALA Most of the forests are inaccessible, owing to lack of roads or other means of transportation. Hence, export of timber has been limited and most of the trees cut from the forests are used for domestic purposes. Minerals Deposits of lead, zinc, chromium, copper, and silver have been mined in the Republic. There are also finds of antimony, iron, gold, fluorspar, magnesite, mica, optical calcite, quartz crystals and sulphur ·of possible commercial value. Evidence of asbestos, coal, graphite, nickel and talc also exist, with questions as to the quantity and quality of the ores yet to be determined. Until very recently there had been no extensive exploita- tion of Guatemala's mineral resources. As of 1950, 206 mining properties had been registered in the whole country, but most of them have not been exploited. Some exploratory work in potential petroleum areas has been carried out, too, but so far no drilling has been started. Power At the present time electric power is relatively expensive. When coal or oil is used, it must be imported first, then carried over a relatively inadequate transportation system at high cost. There is, however, a large potential supply of hydroelectric power, with suitable installation sites, on the rivers running to the Pacific and the Caribbean. 2. THE PEOPLE Distribution Only about half the country's total area is inhabited. Settlement is concentrated in the central highlands, the Pacific slopes and the southeastern agricultural region,1 and is pre- dominantly rural. Guatemala City, the capital, has 283,100 inhabitants; but only two other cities have over 15,000.2 Of 1 Typical figures for population density show over 200 per sq. km. in the DepartmeDt of Guatemala (the highlands), over 50 in Suchitepequez (the Pacific slopes), about 30 in alapa (southeastern region), only nine in the Department of lzabal (Caribbean low- lands), and less than one per sq. km. in the Peten. • Quezaltenango, 27,700; Puerto Barrios, 15,600; according to the 1950 census.  Map II POPULATION DISTRIBUTION !r. _!1• ... J_.. • 1 DoT • 1,200 RURAL Po , ULATION --------- --------1 I r I • VILLAKI AND TOWNS Of' 2-5 ,000 I I • VILLACU ANO TOWN s •• 5·10 ,000 - - - - - - I I EL - EN I ! J If' • QuEUL TENANG0·27 ,000 .GuATDIALACIT't·Z13,IOO s:;_._ I PET = I \ -"!-• I --- oc,AJtTMlNTAL 90UHD.UV "-,~ , . . I I CUI LAPA NAM[ OF Dr•••TMt"T ~' . I ~ ~~ I . I ~ I t J I I " I - -- ------ ' ----------- -1'.-_•.r·-L-- , -----:::=;::j--------------- . ' Ir . ·- . , . ·/ I' ' • -. ...••..... • !f ' • ' • \,' ' ' ".. • V E •-- P. A••p . A z •\ ,____~· I \_ l 4' . 8 4 . ' ' ' / ,- '" 1 "" '·• I·, '/ . ' 0 0 • .. • " •• •, • , • •• • . '.:: . . . •••• 0 ··.: ......... ., • • ·~·• • : • I 0 C •• • • / ,,, ', ·:.' • •••••• •.. ,-.,.. • • :. .:..- - -· . • • • -·. • : • .,,.. • ,. • • ·.:-, •• ':· ... • i ,, -. ' • • /•,. .EC •• : • • "''· .. ·=·:, •. . ·--.. .• .•, .' ..,-.--- • Q o, 0 : ._ • • • • ,:,_-- . ••• ' -· · • : •• ·; , • ' • •• •• .-..·• . ,,,_.· • • ,.. \ •.-M,,_,, • • "'•' •" • • ; •::11!';';:,.,,,~· •'. !·. •. • . •. . • " • •• • ,_;-·-: : - . : • • • •,::.• • • ( •• '-' O:;"/ ::{:·-:·:: : • \ ,' _., ,. ' . • ·' ' ..; _ • ; Y' • - ---- - - - · •• • . 'fl . . ,.-- ) . ' I " . . ··.• . - , :'. .---·), • ;., •\ ' / • • • • •' /·, . -· ,/ / ... ''. ;::. : . ;..... ) "••. ..,\-,,, '... .;_;•_··<·, ,_ .•. ._,.. '.. . ·\ ••: ' • . '... .,·· . ... .> '-. ·.., ... : .... :_ •• ' · ,,... .-• y ' ., •• - - · ---· • •• \ C:, ... ~.-•..•.. } .......,.·,_.,,, ~;.,,,.:~~ . ...... ..:,. ···~·,··· . ' ·, .......... .,_ . .. • ·-~-- •• "0 ' ..,. •·~=·.:.:~:. . :.•.·:·.:-. .. • ' ,,) ~ "~ . .~~ • "R' " ' ' : / • . . , ,, ,,, • • - • .... , • _.. • · - , ; · .. : · ..·.,- • - . ·os " • .H · • • • , : • . •...~· :. ·~·:-:'tif·ffl':'_.:·1 ~ · ,-1,,•',:--t· ,,, •. / •· •,, ..,,, ,-. ..... •,;. ' :i · · · : .:-:·::::. >',-,;,,, , •,,. • ' • ,,.~~ ._, , ., 0 ' " A • • ..... • \• • •" • ~Q ~ ·,.• • ti \ •, ••:,,:, ""• ' o • J•~ • ~ • '.·, •:: ••••<-~ >,•:.: "· ......·:·.t,""t' -~: ·4J··:~:i~;,;.·.••"'-. O • ~:"'-:::: ,;i4 '., • I•',. '.•--'. · ,: ·; p .. ': • \ ;.,-_ __ . ·,'.\'It ..... ~,~-. ),· ·. O •'." , O A,, / ~o . ;e ~. .... •: •, • ,: J A L ·. : v .r-.,__ ·.-:,,.,. V . ,.. A_, , , • •' ': • I ., _.:-,1;;.,., •• ..-. ,,,.. :;•Ce• o ." - "; ; -<, • _. . !'<-· ..,·-··/ : . ·_.,•..• ,. •·•, ""-"--- ,. --.. ,,.... ' ' ---· . ' ............. · -..- ........ •'/.·:·, ...... • 0 " ' :·· • , ,:-•• • • i.:,.,;;,,,______,., '.o :•: ., ' ' , .· •,,,,:-_.. . . . . ..,_ : .••.<"'.i,. ... ::- ~- .., _.., ~-: ,. ., .._. ' ... .'· . \ -·....•. • ,. ... ... ..... ~ . •• . . . .. .,~ ,,... • ,. - ~ ·-- • ,.... • ' '• •, • • • ,J 0 . '--. ~ "- '-..,. __.,., ' .. " ' " " ' . . .. • • • ,. • • ,• • •• • • • '-. • '"'' • .. • 0 •• • • •" .,.•.,,• !," ••.. .• i .. .... .. .•. ... ·. •· .... . .! ".•. .• ••i/•: • ./• .' '.. .:--:.•... ,~, • .I ' • , . • .. """ !!.-~~d'!·~,-~=:::iia...._ ,,, , ., .,.._..,...... .' / : • E SC V I . ,., Jt T ,. : : .-·· ··.•· • ..... ,.• ,/ 't • ' ·/ I) .. ~ I O 20 40 to 10 100 KI L OMETERS ~" ... OUTLINE OF THE ECONOMY 7 the Republic's total populatfon of 2,787,000, the eight largest urban centers together account for less than 15 percent. Descendants of the old Mayan civilization continue to make up the majority of the population. An official estimate indicates that about 60 percent of the Guatemalans are of pure Indian blood; the rest are principally of mixed Spanish and Indian descent, known as Ladinos.3 While the official language is Spanish, it is not universally understood, and a great many Maya, Quiche, and other languages are spoken in the more isolated sections. Social Conditions The cultural isolation and the defensive attitude of the Indians, remainders of their hard experience in centuries past, constitute one of the Guatemala's basic national problems. 4 Most of the Indians, distrustful of white men, still adhere to their ancient languages, customs and traditions, and par- ticipate only to a very limited extent in the money economy and political life of the nation. The Indian way of life has remained highly resistant to modification by outside influences since the time of the conquest, more than four hundred years ago. The main contribution of the Indians, apart from their subsistence agriculture, has been to provide a labor supply for the large coffee plantations at harvest time. This they do without enterprise or enthusiasm. From the time of the conquest until 1944, various government measures were designed to force the Indian to work in this capacity. The most recent of these were the so-called "vagrancy laws," abolished by the Labor Code of 1947. The most influential group in the country is the Ladino third of the population. Active in politics or as plantation owners, professional people or skilled laborers, this is a group which sustains modern national life, and on whose initiative economic and social development of the country must depe~d. • This term is also used for any person not culturally an Indian, regardless of race. ' B ecause th is problem is of special s ignificance for agricultural development, it has been dealt with principally in Chapter II. 8 THE ECONOMIC DEVELOPMENT OF GUATEMALA Prior to the last war, there ,was extensive participation of foreigners, largely Germans, in the economic life of the country. Activities of foreigners are still important, especially in international trade. There is, however, a trend toward naturalization of the foreign-born business groups. Political Development Ever since the declaration of independence from Spain in 1821, factional divisions have been sharp in Guatemala and the political history disturbed. Nevertheless, stability was maintained and some progress achieved during the long periods of dictatorship. The 1944 revolution marked the beginning of a new epoch in the history of Guatemala. A new constitution came into effect in March 1945. Under this the legislative power is vested in a single-chambered Congress, consisting of repre- sentatives ( one for every 50,000 inhabitants) chosen by direct popular vote for four years. Half the membership is renewed every two years. Deputies may not be reelected until after one term has elapsed. The president is normally elected for six years and barred from reelection for a period of 12 years. With the social provisions of the 1945 Constitution and the creation of the Ministry of Economy and Labor in that year, the Government began an active program to improve the lot of the Guatemalan worker. In 1946, the Organic Law of the Guatemalan Institute of Social Security was passed; opera- tions began in January 1948, with a budget of about ~1.25 million and a coverage of 60,000 workers, to be extended progressively. Labor unions began to organize in 1946.11 A Labor Code was adopted in 1947, providing for collective bargaining, settlement of labor disputes in labor courts, and compulsory arbitration of disputes involving public services. Amendments in 1948 required employers to give severance pay to dismissed employees and permitted agricultural workers to join unions regardless of the size of the enterprise in which they worked. • There are now three national labor federations in Guatemala: The Confederaci6t1 de Trabajadores de Guatemala, the Federacion S indical de Guatemala, and the smaller Federaci6t1 Central Regional de Trabajadores. OUTLINE OF THE ECONOMY 9 Economic problems also received new attention with the reorganization of the Central Bank (1946) and the creation of the "Institute for the Development of Production" (1948). Labor Resources Guatemala's labor supply is commonly considered to be inadequate for the needs of the country. Severe l,abor short- ages exist, especially at harvest times, although certain types of workers, such as clerical help, may experience short periods of unemployment. While occupational statistics from the 1950 census are not yet available, some indication of the distribution of workers may be had from the earlier figures shown in Table I. TABLE I OCCUPATIONAL DISTRIBUTION OF THE POPULATION (Based on the Census of 1940) Percentage Number d'f Percentage of active persons of t ot al population Total population (1950 census) ........ 2,787,030 Active population (1940 census) ........ 1,065,964 38.0 Employed in: Agriculture ................................... . 777,509 27.6 73.1 Industry ... ....................... .. ............. . 136,102 4.9 12.7 Commerce ........... .. ......................... 34,045 1.2 3.1 Transportation ......... ................ .. . 5,517 .2 .6 Domestic services ............ .. ......... . 65,000 2.4 6.2 Miscellaneous .. .. ........ .. .. .............. .. 47,791 1.7 4.3 Sou RCE: I nstituto de Fomento de la Producci6n. Age composition probably explains the relatively small proportion of the total population actively employed. Accord- ing to the 1940 census, 46 percent of the total population were less than 15 years of age, a phenomenon which results from the low average life-expectancy of 36 years. Yet it seems probable that at least some of the women, particularly farmers' wives and others engaged in agriculture, were counted neither in the active population nor in the agricultural labor force.  10 THE ECONOMIC DEVELOPMENT OF GUATEMALA 3. NATIONAL INCOME The latest and only reliable national income calculation available, prepared by experts of the U.S. Federal Reserve System at the request of the Banco de Guatemala, estimates Guatemala's gross national product in 1947-48 at the equiva- lent of @335 million. 6 Its principal sources are shown in Table II. T ABLE II E STIMATE OF G ROS S NATIO N AL PRODU CT, 1947-48 Amount Percent Source (in millions )l of total Agriculture (including fishing and for- estry production) ... ........................... .. 0189.8 56.7 Corn ........ ............................................ 045.0 I 13.5 Coffee ... .. ... .......... ............. ... .. .. ...... ...... 26.1 7.8 Bananas ......... ....... .................. .... 18.2 5.4 Beans .. .. ............... ..... ..................... 12.4 3.7 Livestock .... ........ .......... ...................... 35.1 10.5 Fishing ························- ········ ·· ············ .8 .2 Other agriculture ............................. . 52.2 15.6 Manufacturing and mining .................... 46.3 13.8 Food and beverages .... ..... ....... 16.0 4.8 Textiles ....................... ...................... 8.7 2.6 Lumber ..... ........... .. .............. .. 4.2 1.2 Indian handicrafts ........... .... .. 10.7 3.2 Other manufacturing and mining 6.7 2.0 Private construction 4.2 1.3 Private services 61.1 18.2 Wholesale and retail trade 23.5 7.0 Transportation .... 11.0 3.3 Housing ................ ... ..... 17.5 5.2 Other, including professional and domestic services ...... 9.1 2.7 Government 33.6 10.0 National .. ...... ... ............... 30.4 9.1 Municipal and autonomous entities 3.2 .9 Total gross national product 335.02 100.0 1One quetzal (of 100 centavos) equals one United States dollar. • This estimate of gross nat ional product repr esents the total output of goods and ser vices produced in Guatemala. Since it was derived from production rather than expenditure data, and since for purposes of fiscal analysis a measure of total output rather than total expenditure was desired no adjustment was made to allow for the balance of the transactions of the Guatemalan economy with the rest of the world. The figure thus represents the national product produced, and not the product available. Sou RcE: Study by J. H. Adler, E . R. Schlesinger and E. C. Olson in collaboration with the Research Department of the Banco de Guatemala, Public Finance and Econo,nic Development in Guatemala, October 1950, p. 26. ' • One quetzal equals one U .S . dollar. OUTLINE OF THE ECONOMY 11 According to this study, agriculture (in which were arbi- trarily included fishery and forestry industries) accounted for the major part of the national product, or 56.7 percent. The figure is lower than the percentage of the active population employed in agriculture, which comes close to 75 percent. This discrepancy, common in countries where agriculture has to work with little capital, indicates that over-all productivity in agriculture is lower than in other fields. Manufacturing is of secondary importance, representing .only 13.8 percent. The largest individual industries are bever- ages and distilleries (~ 10.3 million), textiles, (~8.7 million), and food processing industries (~5.7 million). Included in this group are also Indian handicrafts, which amount to ~10.7 million or over one fifth of the total manufactured product. On the basis of a population of 2,700,000, the gross national product of ~335 million equals ~120 per capita. This is higher than the estimated 1947 per capita incomes of El Sal- vador ($85), Nicaragua ($65), and Honduras ($60), but lower than those of Panama ($181), and Costa Rica ($146). The distribution of income is, of course, still very unequal. In an estimate made by the Banco de Guatemala of the income of 550,000 Guatemalan families, 24 percent of the families were found to have an annual income under ~100, and 69 percent had less than ~400. Thus, if the high cost of living is taken into consideration, it is evident that little contribution to capital formation can be expected from the mass of the population. 4. FOREIGN TRADE Guatemala's foreign trade is the largest of any of the six Central American countries. Ordinarily it accounts for one third of the value of their combined exports and about one fourth of their total imports. Coffee is still the most important export product, although there has been some diversification in recent years. In 1949, coffee accounted for about 72 percent of the total value of exports. Bananas, whose share in the late thirties amounted to approximately 27 percent, now represent about 14 percent 12 THE ECONOMIC DEVELOPMENT OF GUATEMALA TABLE III FOREIGN TRADE IN SELECTED YEARS, 1927-49 Exports, F.o.b. (unadjusted) Imports, c.i. f. Year (in millions) (in millions ) 1927...................................................... .... 033.9 025.0 1929................................. :...................... .. 24.9 30.4 1933.......................................................... 9.3 7.6 1938.......................................................... 18.3 20.9 1941.......................................................... 14.5 16.1 1946.......................................................... 36.7 36.2 1947 ................... .................'.. .................... 52.0 57.3 1948.... ...................................................... 50.2 68.3 1949................ .......................................... 52.2 67.9 S0u1tcE: I nstitvto de Fomento de la Prodvccion; International Monetary Fvnd. of all exports on the basis of customs returns. Other items include chicle, essential oils, abaca, minerals, cacao, timber, meat (occasionally) and assorted lesser products (Table IV). TABLE IV VALUES OF PRINCIPAL EXPORTS, F.O. B. 1948 1949 Produced (in thousands) ( in thousands) Coffee 030,916 037,367 Bananas! ........ .. ......... ................... . 10,319 7,585 Chicle ... ....... ............. ... .. ................. . 2,747 1,843 Abaca ...... .. ................. .. ... ............ .. .. 2,184 1,909 Essential oils ... ... .. ............. .......... . 850 1,083 Meat ..... ........ .. ................................. 700 Timber ........................................... . 512 160 Sesame ...... ... .................................. . 333 n.a. Honey .............. ............................ .. .. 295 267 Hides ............................................. . 260 327 Cardemon ..................................... . 121 96 Zacaton root .. .. ............ .. .... .. ......... . 69 54 Cinchona .......... .. ........................... . 52 18 Other ... ............................ ... ... .. ... ,.. . 808 1,517 Total ......... .......... ................ .. . 050,166 052,226 • Unadjusted figures. S0u1tcE: Direccion General de Estadistica. OUTLINE OF THE ECONOMY 13 In contrast to the exports, the Guatemalan imports consist of a great variety of items (Table V). Machinery represents the largest group (24 percent in 1949), followed by textiles (17 percent), foodstuffs (11 percent), iron and steel manufac- tures (seven percent) , and chemicals (seven percent). TABLE V VALUES OF PRINCIPAL IMPORTS, C.I.F. 1948 1949 Produced (in thousands) (in thousands) Machinery and tools ............... ... . 016,893 017,132 Petroleum products .... .. ..... ......... .. 5,729 4,665 Cotton fabrics ................ .. ...... ....... . 4,184 4,114 Iron & steel manufacturing ......... . 4,127 4,942 Foodstuffs & beverages ........... .. .. . 6,253 7,625 Clothing ................................. ... ..... . 3,427 3,832 Paper .. ................ ............................ 2,196 1,884 Rayon fabrics .. .. ...... .... ................ .. 1,599 1,276 Fungicides, etc . ........ .... .... .......... .. .. 1,540 1,019 Ginned cotton ................ .............. .. 1,426 998 Threads, yams, and rope .. ... ...... . 1,043 1,045 Pharmaceutical products ........ .. .. 1,008 1,074 Rubber products .............. .. ........ .. 950 818 Woolen fabrics .. .... .. .... .. .... .. ...... .. .. 905 564 Other .......... .. .......... .... .... . 16,979 16,995 'Total ............. .. .. .. ........... .... .. . 068,349 067,983 SouRCE: Direccion General de Estadistica. Traditionally, Guatemala's biggest customer has been the United States, whose share has increased still further since the last war. In 1938, the value of Guatemalan exports to the United States amounted t~ 69.5 percent of the total, and in 1948, to 92 percent. Germany offered the second largest market for Guatemala in the thirties, taking in 1938 about 15 percent of her exports; at present, of course, this trade is only begin- ning to reappear. Canada now takes second place, with a share of about three percent. Other customers are the United King- dom, Belgium, Sweden and Switzerland, who in recent years have together absorbed from five to six percent. 14 THE ECONOMIC DEVELOPMENT OF GUATEMALA As a supplier, the role of the United States is also pre- dominant. In the late thirties the United States customarily provided 45 percent of Guatemalan imports, while Germany supplied about 35 percent. Since the beginning of the last war, however, the United -States share has increased greatly, accounting for 73 percent of the total in 1949. Latin American countries as a group come second, with a combined share of 13 percent; of these the most important is Mexico, with five percent. Europe now provides only a small part, with the United Kingdom (two percent) the leading supplier. It may be expected that W estem Europe will contribute a greater share as her industrial production increases. 5. BALANCE OF PAYMENTS Guatemala has usually maintained an active trade balance, w hile services and capital accounts show appreciable fluctua- _ tions from year to year. Only for the last four years have adequate balance-of- payments calculations been prepared by the Banco de Guate- mala. For this reason, no direct comparisons can be made with prewar conditions. Main items in the balance of payments for 1946, 1947, 1948 and 1949, as prepared by the International Monetary Fund from data provided by the Banco de Guatemala, are presented in Table VI. Even in these, however, official trade differ substantially from adjusted values. , 6. THE MONETARY AND BANKING SYSTEM Institutional Framework Like other American nations, Guatemala has experienced difficulty in inflationary periods,j he outstanding one being the thirty years from 1895 to 1925. The old Guatemalan peso fell from its value of about half a dollar in 1895 to a low of 60 to the dollar in 1923. A vigorous program for currency reform was put into action in 1923 when the newly established Caja Reguladora began to retire the old paper pesos. In 1925 a new currency, the quetzal, was created at a par with the U. S. dollar. A semiofficial Central Bank was organized in 1926 on OUTLINE OF THE ECONOMY 15 TABLE VI MAIN ITEMS IN THE BALANCE OF PAYMENTS, 1946-49 (in millions) 1946 1947 1948 1949 A. CURRENT TRANSACTIONS: Exports f.o.b....... ...... ... ... 051.5 065.6 067.4 063.2 Imports £.o.b. -31.9 -49.9 -61.5 -60.9 Trade balance 19.6 15.7 5.9 2.3 Transportation - 3.8 - 5.6 - 6.9 - 7.7 Insurance ...... ........ .. ....... ........ ...... . - 0.8 - 1.1 - 1.3 - 1.4 Investment income ...... .......... .. ... . - 8.0 - 5.0 - 6.7 0.1 Foreign travel and tourism ...... .. 0.5 1.3 2.0 0.8 Other services (net) ......... ...... ... .. 0.1 - 0.2 - 0.3 0.2 Balance on services .. .... ... . -12.0 -10.6 -13.2 - 8.0 Balance on goods and services ..... . 7.6 5.1 - 7.3 - 5.7 B. PRIVATE CAPITAL MOVEME N TS: Capital movements ..... .... ... .. ..... ... 3.2 4.7 3.5 - 8.3 C. OFFICIAL FINANCING: Public debt amortization - 0.1 - 0.1 - 0.1 - 0.1 Gold subscriptions to IMF and IBRD .... - 1.3 Grants and contributions to and from international organiza- tions (net) 1 . . .. ...... .. .... .. . .. .. . ... . . 0.9 2.2 2.1 1.7 Balance on capital movements ... . 4.0 5.5 5.5 - 6.7 Total balance ..... .. ...... ..... .. . 11.6 10.6 - 1.8 -12.4 D. ERRORS AND OMISSIONS .. ... .... ........... - 4.4 - 8.2 - 4.5 2.4 E. SURPLUS OR DEFICIT (-) .... ... .... .... . 7.2 2.4 - 6.3 -10.0 ( corresponding to changes in gold and foreign exchange reserves) 1 This item includes small amounts of private donations. SOURCE: Figures for 1946 have been published in the International Monrtary Fund Balance of Payments Yearbook issued in 1950. Figures for 1947, 1948 and 1949 arc taken from the forthcoming IMF Balance of Payments Y carbook. strictly orthodox lines, with exclusive power to issue notes backed by a gold reserve of at least 40 percent. 16 THE ECONOMIC DEVELOPMENT OF GUATEMALA Parity with the dollar has been maintained ever since; but the rigid regulations of the old Central Bank had unfavorable economic consequences arising from violent fluctuations in the money supply, determined by external circumstances. In the three-year period of 1930 to 1932 there was a reduction of over 40 percent in the money supply, while in the six years between 1939 and 1944 it almost trebled. It became clear that some measures were needed to assure monetary and exchange stability and at the same time to or- ganize a financial structure that could support economic devel- opment. New monetary and banking legislation, prepared with the help of specialists of the U. S. Federal Reserve Sys- tem, was adopted by the Guatemalan Congress in 1945 and 1946. This, as it now stands, consists of three main laws: the Monetary Law, the Central Banking Law, and the Bank Law.1 The Monetary Law is the basis of the whole system. Among its many interesting features is a provision for sterilizing cur- rency revaluation profits and losses, and "hot" capital inflow. Another is the "emergency regulation of international trans- fers", providing for exchange restrictions if there is a current nonseasonal drain of more than 25 percent of gold and exchange reserves, or if such reserves fall to less than 40 percent of the average sales of foreign exchange in the preceding three years. Under such an emergency regime, . exchange for non- essential imports is to be sold by auction. The obligation to maintain reserves is thus related to external obligations, not to the internal money supply. The Central Banking Law defines the objectives of Central Bank policy, distinguishing between domestic and international aims. It provides for internal stabilization of the money sup- ply through credit policy, flexible reserve requirements for banks, and open market operations, always with due regard to the exchange reserve situation and external stability of the curren~y. 8 Net international reserves are carefully defined. 1 More detailed descriptions of these laws may be found in the Federal Reurv1 Bulletin, March 1946 and April 1947 isues. 8 As an example of the many restrictions for this purpose, it is interesting to note that public and semipublic securities cannot be purchased by the Banco de Guatemala when international reserves are less than 2 5 percent of the average· sales of foreign exchange in the preceding. OUTLINE OF THE ECONOMY 17 An independent Monetary Board (Junta Monetaria) interprets policy, acts ·as an adviser to the Government, makes major decisions on monetary credit and exchange matters (including emergency exchange restrictions), and has the specific func- tion of coordinating public or semipublic finances with general monetary policy. A "Fund for the Regulation of the Bond Market" is created within the Banco de Guatemala, to assist in the marketing of public and semipublic securities; its resources come from Government contribution, and Banco' de Guatemala profits. Under the Bank Law three main types of banks are recog- nized: commercial, mortgage, and capitalization9 banks. The law relates capital requirements to the quantity and quality of assets rather than to the volume of deposits as is more usual. This affords a new technique that can be used for sele.ctive credit controls and also provides, together with the reserve requirements in the Central Banking Law, adequate instru- ments to limit credit expansion. Credit Facilities Available to the Public Within the satisfactory legal and institutional framework now provided, the banking institutions should be able to de- velop and diversify their activities; but they have hardly begun to do so. The currency crisis of 1920 was .a severe blow to private banks. Only three of importance 10 now operate in Guatemala and these do not engage in any substantial medium- or long-term financing. For fields other than coffee, and to a lesser extent cattle and som~ well-established commercial activities, adequate credit facilities have always been lacking in Guatemala. To relieve this situation, the Government has created several financial institutions. One of these, the Credito Hipote- cario Nacional, is an important lender for agricultural purposes and public works; it also has a department of insurance and • Institutions resembling life insurance companies in the sense that they guarantee the payment of a sum representing the capitalization of periodic payments. JD These are: the Banco A gricola Mercantile, (successor to the old jointly controlled Central Bank, superseded in 1946 by the Banco de Guatemala); a branch of the Bank of London and South America in Guatemala City ; and the Banco de Occidente, in Quezaltenango. 18 T H E ECONOMIC DEVELOPMENT OF GUATEMALA capitalization. Another is the Banking Department of the Instituto de Fomento de la Producci6n (INFOP), established in 1948 to give medium- and long-term credit for agricultural and industrial purposes. 11 TABLE VII TOTAL BANK DEPOSITS (Outside of the Banco de Guatemala) AS OF MARCH 31, 1950 ( in millions ) Banco Agricola Mercantile... .... .. .................................. 010.6 Bank of London and South America....................... ..... 9.9 Banco de Occidente........................................ .. ................ .6 Credito Hipotecario Nacional... ..................................... 8.4 INFOP (Development Institute) ................................ .6 Total ... .............................. .. ... .. .... :............... 030.1 • Money Supply Over the last four years the money supply has remained relatively stable. From the establishment of the Banco de Guatemala in 1946 through June 1950, the money stt'pply (in- cluding government deposits) increased only by 10 percent from 57.6 million quetzales at the end of 1946 to 62.6 million on June 30, 1950. · However, this relative stability conceals a loss in inter- national reserves and an internal credit expansion, illustrated by the percentages showing the origin of the money supply. In 1946, money of internal origin represented only 14 percent of the total. In August 1950, it accounted for more than 40 percent. Internal monetary expansion originated mainly in government activities for public works, housing, and credits to private and national enterprises. Exchange Reserves Guatemala's gold and foreign exchange reserves over recent years are given in Table VIII. The figures show a progressive decline since 1947. In September 1950, the international reserves of the Banco de Guatemala were down to 33.5 million 11 For a description of I N FOP, see Chapter VIII following Recommendation No. 62. OUTLINE OF THE ECONOMY 19 quetzales. By December 1950, however, this downward move- ment had been reversed and the reserves had returned to the level which they held at the end of 1949. Guatemala's private short-term assets in the United States amounted to 14.2 million dollars at the end of 1950. TABLE VIII G OLD AND FOREI GN EXCHA N GE RE SERVES, 1946 TO 1950 ( in mill ions) Sept. Dec. Rc1ervc1 1946 1947 1948 1949 1950 1950 Banco de Guatemala .... 046.7 049.6 046.1 036.7 033.5 037.3 Treasury .... .................. 2.5 2.5 1.4 .4 .3 .3 Other banks ................ 2.7 2.2 1.9 2.8 1.4 2.5 Total 51.9 54.3 49.4 39.9 35.2 40.1 S OUR CE : International Monetary Fund. Public Finance By far the most important elements in Guatema,lan public finance are the receipts and expenditures of the national government, which collects 90 percent of all public revenues. Approximately 80 percent of receipts in 1948-49 were from taxes, the remainder being proceeds from public services or income from public properties and enterprises. Among the latter, the net proceeds to the state budget of the government-owned Pincas Nacionales (whose sales of coffee totalled @7.3 million for 1948-49) cannot be determined with precision. They are estimated at over three million quetzales in the 1950-51 national budget, but at less than @700,000 in the budget of the Pincas, which have been autonomous since June 1949. Sources of tax receipts in 1949, together with budgetary expenditures by broad categories, are shown in Table IX. The largest separate budgetary items were for education ( more than six million quetzales), agriculture (@5.5 million), public works (@5.2 million), and public health (@3.7 million). The internal public debt has risen from less than five miltion quetzales in 1947 to almost 15 million quetzales at the end of 20 THE ECONOMIC DEVELOPMENT OF GUATEMALA 1950. Nonbank investors hold less than 01.3 million of securi- ties guaranted by the Government. The external public debt ({(1670,000) 1s significant; in addition to this, however, a balance of £426,000 is claimed by the British Corporation of Foreign Bondholders. This last claim is not recognized by the Guatemalan Government. TABLE IX TAX RECEIPTS AND EXPENDITURES, 19491 Percentages of Amount total receipts (in millions) total expenditures A. RECEIPTS Direct taxes .................................. 0 3.6 8.3 Property taxes ................................ .7 1.6 Consumption taxes ........................ 8.9 20.5 Import taxes ·································· 14.3 32.9 Export taxes .................................. 2.6 6.0 Licenses and other business taxes 3.2 7.4 Fines and fees .... .......... .................... .3 .7 Other tax receipts .. .................. ...... .2 .5 -- 33.8 Other receipts2 .............. 9.6 22.1 -- -- Total ........................ 043.4 100.0 B. EXPENDITURES Administrative expenditures ...... 015.4 31.3 Social and cultural expenditures 16.5 33.3 Expenditures f~r development.. .. 11.5 23.3 National defense expenditure ...... 5.3 10.7 Public debt services ......... ..... .......... .7 1.4 -- -- Total ························ 049.4 100.0 -- 1 These figures ar e those shown in accounts of the Court and Control Office of Accounts, and are at some variance with figures published by the Banco de Guatllffl4la. 1 Mainly from public services and government enterprises. Sou RCE: Adler, Schlesinger and Olson, op. cil. OUTLINE OF THE ECONOMY 21 For a.long period prior to 1947, budgetary deficits had beea almost unknown in Guatemala. But data published by the Banco de Guatemala (Table X) show that, on the basis of actual receipts and expenditures, deficits amounting to ~9.4 million have been accumulated in the last three years. TABLE X BUDGET DEFICITS, 1947-48 TO 1949-50 (in millions) Years R eceipts Expenditures Deficit 1947-48.................. 9.)39.6 041.5 01.9 1948-49 .................. 44.4 47.0 2.6 1949-50 .................. 42.4 47.3 4.9 9.4 Judging from the decrease in government deposits with the Banco de Guatemala, probably about two thirds of these deficits have been met out of previous surpluses. The increased deficit in the fiscal year 1949-50 does not indicate a deterioration of the budget in that year, but merely the payment of previously incurred expendj tures. Estimates for 1950-51 provide for a balanced budget.  CHAPTER II Al!1riculture and the Rural Economy I. An Inventory 1. BASIC REsOUBCES Of all the Central American Republics, Guatemala is per- haps the best endowed for a varied agriculture. In no other country of this group can be found so many different climatic conditions and soil types. What is even more significant, a large percentage of the soils is of volcanic origin and extra- ordinarily productive. Almost any crop known in the Western Hemisphere can be grown in some part of Guatemala. The upper Pacific pied- mont, at altitudes of 1,500 to 4,500 feet, is one of the best coffee regions in the world. Below this, on the alluvial slopes and Pacific lowlands, are some of the best soils in the Latin American tropics 1 now largely wasted on low value crops under inefficient cultivation. Various temperate regions like the Zona Reyna or the southeastern valleys, tropical areas such as the Motagua Valley or the large Peten, offer opportunities for future development. · Rainfall is seasonal but generally adequate; irrigation is necessary in only a few regions or to raise extra crops in the dry season between December and April. Prevailing wind and ocean currents cause the Caribbean lowlands and adjacent valleys to be hotter and wetter than the tropical Pacific coast. Between regions of the country the variations in altitude are, however, actually of greater significance than variations in precipitation in the choice of crops. One adverse factor is that a large part of the land is moun- tainous. Particularly in the highlands-the only overpopulated area-this results in the harmful cultivation of steep slopes. But there is no shortage of arable land and a number of areas more suitable for tillage are still either idle or underutilized. 1 Juan U. Maegli, Guatemala: Problems and Possibilities of Industrialiazlwn; thesis, (Harvard University, Cambridge, Mass., 1949). 22 AGRICULTURE AND THE RURAL ECONOMY. 23 2. PRODUCTION Agriculture is by far the most important productive pursuit. It engages an estimated 75 percent or more of the occupied labor force, .creates nearly 57 percent of the gross national product, and accounts for 95 percent of the value of the country's exports. Although Guatemalan industry, by com- parison, represents only 14 percent of the gross national pro- duct, it depends upon domestic agriculture for more than half of its raw materials. Corn and beans, the principal items in the country's diet, are the leading crops for domestic use, but appreciable quanti- ties of sugar, ri'ce, tobacco, fruits and vegetables are grown. Exports crops are predominantly coffee and bananas, but the importance of abaca and the essential oils is increasing. Live- stock production, although deficient, nevertheless represents over 10 percent of the gross national product. A precise analysis of present agricultural production and land use is difficult, if not indeed impossible, because of notori- ous inadequacies in the existing agricultural statistics. Pre- peration of better statistics has begun only since the 1950 cen- sus, from which full results are not yet available. For some of the principal crops and agricultural commodities, however, Table XI offers rough approximations of the quantities and values of production, with calculated percentage contributions to the gross national product. Such data are not uniformly accurate for all commodities, unfortunately. Those for export crops are more reliable than the others since they can be com- pared with customs and shipping figures. Even from this brief and incomplete statistical picture it is clear that the value of domestic agricultural production, which provides the livelihood of the mass of the population, is very small. The actual output for domestic consumption in 1947-48 was only about ~125 million, which for a population of 2.7 million represents a value of ~46.30 per capita.2 In contrast with the poverty of domestic subsistence agri- culture is the prosperity of export agriculture. This is particu- • The per ca pita income of the Guatemalan Indian is estimated at a round 070 by Messrs. Adler, Schlesinget a nd Ol sen, op. cit., while that of the non-indigenous popula- t ion is calcul ated a t li}246. 24 THE J<;CONOMIC DEVELOPMENT OF GUATEMALA TABLE XI ESTIMATED OUTPUT OF PRINCIPAL AGRICULTURAL PRODUCTS, 1947-481 Est imated Estimated Percent production value of..'Jross Product (metric tons) (0millions) .nation product MAINLY USED DOMESTICALLY: Com ···························· 544,300 45.0 13.4 Beans ................ .......... 45,360 12.4 3.7 Rice ······························ 9,070 2.2 .7 Wheat ........................ .. 13,600 3.0 .9 Sugar .................... ...... 27,200 2.6 .8 Cotton .. .. .. ... ... ...... ..... ... 1,800 1.2 .4 Tobacco ...................... 1,270 1.1 .3 Potatoes ...................... n.a.2 4.2 1.3 Fruits and vegetables n.a. 12.5 3.7 Livestock ... ....... ......... - 3 35.0 10.5 Others ················ ·········· - 14.1 4.2 Total domestic .. --- - -- 133.3 -- 39.9 MAINLY EXPORTED: Coffee .......................... 60,960 26.1 7.8 Bananas .... ....... ...... .. ... 285,8004 18.2 5.4 Abaca ............ .... .. .. ..• .. . 4,870 3.5 1.1 Chicle .......................... 960 2.6 .8 Essential oils .............. 473 .8 .2 Cacao .......................... 91 - 5 - Timber6 ······················ n.a. 4.5 1.3 Total exported .. --- - -- 55.7 -- 16.6 --- -- -- Total ............ - 189.0 56.5 1 Latest year for which most figures have been made available. Data from various sources, and subject to correction. 1 Not available. • For slaughter statistics see Table XV. • Represents 13.4 million stems. • Less than 050,000; included in "others." • Arbitrarily classifi ed as agricultural. larly true of coffee cultivation, which contributes more than 70 percent of total exports and is the basic cash crop on which nearly everything else depends. At present prices, coffee should represent an even greater source of wealth than it does now, 3 since its output could be substantially increased m a few years. • The value of 1950 coffee exports was over 052 million (preliminary figure).  Map III I ... AGRICULTURE AND LAND ·usE ... •o• ... 'l.._. ( - - • D PLANTATION AIJIICULTURE•CO"tt PLANTAT 1ON AGR I CUL TUR£ • BANANAS SUBSISTENCE FARMING CATTLE RANCHING ~ CATTLE RANCHING AND SUBSISTENCE FARMING " EZJ FOREST 17• m FOREST PRODUCTS AND SCATTERED SUBSISTENCE FARMING PROVINCIAL 8ouNOARY 0 PROVINCfAL CAPITAi. .•. ~ ~ I' ,:) q.. ... <) ~ 0 ~ '°• .. . .:" ,. 0 0 ·-- r " \...- "" -, C' ; ... .-~~J••• • .•·• .i·· "' 0 IO 20 30 40___ !IO . , • •• •·•• •·· • •. - 4' ; C' • /'I • • .! MIL(S 0 _._....._....,_,..._..:..._ • • • • • : •• . •• _,,.,. ~" 0 e-a 20 Ed '\L 60 e-a 'L •go ceA •• ••• Y ·T~.f KILOMETERS ... N ... 10• ... AGRICULrtJRE AND THE RURAL ECONOMY 25 Bananas, the second largest export, also represent an im- portant source of foreign exchange income. Their influence on the Guatemalan economy is less direct, however, as their production is largely in the hands of foreign enterprises. Other export products such as abaca, essential oils and timber are at present of relatively minor significance, but could be increased substantially; this could be said also of certain products now imported, including milk, ginned cotton and fruit juices. 3. PRACTICES AND PROBLEMS One basic reason for the present inadequacies of agricul- tural production lies in the isolation in which so many Guate- malans live. The larger part of Guatemala's population is Indian, settled in the country long before the coming of the Spanish. It retains its own cultur~ e and languages and main- tains traditionally suspicious attitudes toward outsiders. Cir- cumstances have tended to concentrate the Indian population on the impoverished slopes of the mountains, often on land fundamentally unsuited to the cultivation of cereals. This has been brought about in part by better health conditions in the highlands; but in addition, the choicest coastal and valley lands have been held since early Spanish colonial times by a small number of landlords living in national or departmental capitals. Cultural isolation and the self-perpetuating poverty of the Indians have contributed to the survival of antiquated methods. In the preparation of their land, the Indians rely on fire as the main tool to clear trees and brush, to destroy insects and to kill weeds. The soil is then loosened and cultivated with hoes, machetes and pointed sticks. Contour farming is often used on the steep slopes, and after a few seasons the exposed soils are easily washed away by heavy rains and the weeds and insect pests cannot be kept under control. The land is then aba~doned and another plot is cleared. It is natural that, with this type of cultivation, the central highlands have become seriously deforested and eroded and their available fertile land has become quite scarce. Other factors hampering the development of Indian agri- culture, even in its present location, might be eliminated more 26 THE ECONOMIC DEVELOPMENT OF GUATEMALA easily. Seed quality is poor, tools are rudimentary, and the use of fertilizer and insecticides is practically unknown. Agri- cultural marketing facilities, including transportation and storage, are either lacking or at best inadequate, cumbersome and wasteful. Agricultural credit for the Indian is practically nonexistent; when he borrows money, it is for consumption needs and takes the form of an advance from the farm labor contractors against the sums to be earned during the picking of the coffee crop. Psychological obstacles to progress and antiquated methods are not found among Indians alone. The agricultural practices of the Ladino population could be greatly improved. Many large landowners have the traditional attitudes of absentee landlords, content with one yearly inspection of their farms and interested only in the total amount of immediate cash income however ruinous the production methods used. On many coffee farms the lack of care of the land and trees, as well as outmoded planting practices, have kept output far below the potential maximum. In the lower Pacific coastal region, potentially one of the richest and with fairly adequate railway transportation, some of the best land has been held in complete idleness. That which has been cultivated has not been farmed intensively through modern mechanical and scientific methods, nor have efforts been made to improve sani- tation or to attract and educate a skilled labor force. Problems of education, adaptation to new techniques and the maintenance of soil fertility are infinitely less difficult and can be solved much more rapidly in the non-Indian sectors of the rural economy. The task of increasing the yield and promoting intensive mechanized cultivation of fertile lowland areas probably can be accomplished in a few years, provided that needed improvements are clearly defined and vigorously applied. In the long view, however, the basic proverty of Indian highland agriculture permanently hampers not only agricultural progress but the whole economic growth of Guate- mala; for the Indian population comprises the bulk of the potential internal market, without which inddhy cannot develop adequately. AGRICULTURE AND THE RURAL ECONOMY 27 II. Policies for Progress It is clear that any appreciable rise in Guatemala's standard of living can come only through improvements in agriculture. For Guatemala, this is the basic source of wealth; and it is a fortunate one, since agriculture is the one resource capable of renewing itself indefinitely if managed properly. Yet in its present state this agriculture presents a dis- appointing picture. Some of the most fertiJe soils of Latin America yield only a very meager subsistence of foodstuffs to the mass of laborers living on them while, in terms of money income for development, the possibilities offered by export crops such as coffee are far from being fully exploited. 1. Two CoNCURBENT PROGRAMS This relative stagnation can probably be explained by two different kinds of handicaps. One relates mainly to patterns of culture and human settlement which can be changed only in the long run. The other obstacles are mostly of a technical nature, so that an intelligent utilization of natural resources can eliminate them rather_quickly. The presence of a funda- mental long-term problem together with significant oppor- tunities for short-run improvement has led the Mission to outline in the following recommendations two main develop- ment programs, to be pursued concurrently. Recommendation No. 1: Promote the growth of coffee production and the development of the Pacific coast as the two main immediate objectives of agricultural policy. Recommendation No. 2: As a major aim of long-term policy, adapt agri- culture in the highlands to the new requirements of a p~ogressive economy. Short-Run Development The short-run program seeks to utilize, to a greater extent than now, two particularly promising aspects of Guatemala's Property of the International Bank for Reconstruction and Development 28 THE ECONOMIC DEVELOPMENT OF GUATEMALA agricultural resources. One of these is coffee production; the other is the relatively undeveloped Pacific coast. Coffee production is the one activity in which immediate action can be expected to provide the necessary financing, not only for agricultural development, but for development in other sectors of the economy as well. Like many other things in Guatemala; the whole investment program prepared by this Mission is dependent upon increased returns from coffee. Such emphasis on coffee need not in any way interfere with agri- cultural diversification; for,. in view of the varied resources of the country, diversification is both possible and desirable to mitigate the effects of fluctuation coffee prices. The second fundamental phase of the short-run program is the development of the Pacific coastal area, with the intro- duction of modern agricultural methods. Only by this means can the country achieve a prompt and substantial increase in foodstuffs at reduced prices. These economies in production will, in turn, accelerate the replacement of inefficient highland agriculture by more productive activit;ies in all regions. They will also provide a better supply of raw materials for industry, while the lowering of prices for basic foodstuffs will be an all-important factor in the growth of domestic markets. Long-Run Development It is recognized that these steps by themselves will not solve the basic problem of integrating the population into a single economy. For Guatemala's long-run economic progress, it is indispensable that the productivity of the Indians be raised so as to provide them with purchasing power over and above their subsistence needs. This will require measures aimed at improving their education, health, nutrition and pro- duction methods, as well as finding for them new occupations in agriculture and industry more productive than the present inefficient cultivation of highland corn. Progress may be realized in part by the development of cattle raising or dairy farming in the highlands, by the development of small indus- tries using traditional or new skills of the Indian population, and by resettlement of some of the population in regions better adapted to progressive agriculture. AGRICULTURE AND THE RURAL ECONOMY 29 The prospect of such an adaptation might seem dis- couragingly lengthy. It cannot be expected to show startling results in the immediate future. The Mission feels, however, that it remains the central problem in. Guatemalan agricultural and economic growth, and as such should always be kept plainly in view. Progress, even if slow, should be continuous. Overlapping The two parts of the development program are by no means mutually exclusive and indeed will overlap at many points. In the recommendations which follow, the Mission has addressed itself mainly to the implementation of the short-run program and has dealt with it first. In regard to the long-run plan, the Mission has limited its suggestions to those which can be started immediately, leaving later details to be developed with experience. This should not imply that the long-run program is any less important, but only that from a practical stand- poin"t its full course cannot be charted at once. Without a vigorous and immediate start to bring about the necessary adjustments in the highlands, severe hardship might be experienced in these regions following the development of mechanized agriculture in the lowlands. 2. COORDINATION Recommendation No. 3: Place under the Instituto de Fomento de la Produc- ci6n (INFOP) the national planning of agricultural development and administration of funds for this purpose. Improvement of agricultural production in the shortest possible time requires the prosecution of a large number of projects, separate yet indirectly related. Among others, these include plans for research in a wide variety of fields, extension services, agricultural credit and marketing. For these purposes the resources at the disposal of the Guatemalan Government are limited. This means that dupli- cation and waste must be avoided, and that there must be a 30 THE ECONOMIC DEVELOPMENT OF GUATEMALA schedule of priorities to prevent the draining of funds into projects of purely secondary importance. Obviously such objectives can be achieved only if the planning agency is properly coordinated with those agencies controlling the avail- able funds. Inasmuch as INFOP was designed to serve as an over-all planning and development body and was endowed with funds for that purpose, and since it has assumed (at least tempo- rarily) responsibility for the financing of the Instituto Agrope- cuario Nacional (IAN), it is suggested that INFOP should be designated as the central agency responsible for future agri- cultural development programs. Recommendation No. 4: Create a Section for Agricultural Statistics in the Central Statistical Office. AU efforts at development-including even the work of · this Mission-are made more difficult by the absence of accu- rate and up-to-date statistical information. Future planning will have to depend upon such data in order to determine the country's real needs as the program progresses. It is therefore proposed that a Section of the Central Statistical Office be created for this purpose. The main office of the Section will probably require three or four trained statisticians. A competent representative should be stationed in each Department of the Republic to organize and supervise the reporting. Additional field per- sonnel need not be professional statisticians but will require some training. Assistance of a foreign specialist in crop and livestock reporting may be useful during the first year while the service is being organized. The new Section's first task should be to develop an adequate system of estimating and reporting crops. Close relations should be maintained with the country's technical agricultural services, and their reporting facilities should be utilized fully. AGRICULTURE AND THE RURAL ECONOMY 31 3. AGRICULTURAL RESEARCH, EXTENSION AND TRAINING Recommendation No . 5: Intensify national agricultural research. Important fields for study include: (a) Introduction, selection and adaptation of im- proved plant varieties; (b) Crossbreeding and better feeding of livestock for higher production under local conditions; ( c) Control of plant and animal pests and diseases; ( d) Soil management and conservation; ( e) Economic cultivation and utilization of poten- tially valuable indigenous wild plants. Agricultural development in any country or region depends upon research. Plants and livestock in each area must be selected and adapted to local conditions to yield good returns. Because of the variations in soil, climate, altitude, length of day, focally prevalent insect pests and diseases, and similar factors, it is seldom possible to depend entirely µpon the results of such research in other areas. As an illustration, hybrid corn which gives excellent performance in certain parts of the United States will not grow well in Mexico, while the corn recently developed for Mexico has proved unsatisfactory in Cuba; probably neither will do as well in Guatemala as the Tiquisate Dorado corn recently devdoped for local conditions. The use of fertilizers is popularly discussed as a method for increasing crop production. But fertilization is not a simple treatment to be used uniformly on all soils or for all types of crops. It consists of applying to the land specific elements or components in which the soil may be deficient, in amounts determined by the needs of the particular crops to be grown. Th~se requirements must be determined by analysis and re- search in each case before fertilizers can be used intelligently. There is need for more research on coffee, grains, legumes, vegetable oils, hard fibers, beef and dairy cattle, hogs, sheep, pastures and forage crops, feed storage methods, livestock 32 THE ECONOMIC DEVELOPMENT OF GUATEMALA feed supplements, fertilization, cultivation practices and utili- zation of agricultural wastes, to name only a few of the oppor- tunities for improvement. There should be facilities for submitting all planting ma- terials, whether of local or foreign origin, to a series of field tests to determine regional adaptation, spacing, time of plant- ing, soil requirements, crop yields, and resistance to pests, disease and weeds. For these and other research purposes there should be a number of coordinated agricultural experi- ment stations, situated in various parts of Guatemala repre- sentative of the main soil and climatic conditions of the country an_ d staffed with competent research personnel. As soon as possible a system of seed certification should be established and adequate provision made for distribution of improved seed to farmers. Seed production farms, now chiefly limited to corn, should be extended to wheat, beans and other crops. Agreements may be made with certain farmers to produce seed under supervision, as is practiced with corn and wheat in Mexico through its Comisi6n de Maiz. At Cuyuta an excellent beginning has been made by INFOP, with the help of the Iowa State College Tropical Center, in the production of the Dorado seed corn. A particularly interesting field for research lies in the utili- zation of native or a<Japtable plants not now exploited in Guatemala. There are a number of such plants that might help to meet dietary deficiencies of large parts of the population. The Nutrition Institute of_ Central America and Panama, with headquarters in Guatemala City, is currently conducting studies toward more intensive use of vegetable proteins as a substitute for animal proteins which are expensive and scarce in the highlands; IAN also has been carrying on promising research along these lines. A case in point is the possible introduction of the soya bean, varieties of which can be grown in practically all parts of Guatemala. Recent research in Mexico has disclosed the existence of some 15 unexploited vegetable oil plants, many growing wild in areas adjacent to Guatemala, which may prove suitable for cultivation for various purposes including feed, soap and paint manufacture. AGRICULTURE AND THE RURAL ECONOMY Recommendation No. 6: Centralize agricultural research under INFOP in the Instituto Agropecuario Nacional. Although competition in research is often helpful in pro- moting better work and faster progress, it is feasible only when there are sufficient financial resources and experienced person- nel available to support more than one program of an efficient size. When such resources are as limited as they are in Guate- mala, there is a decided advantage in pooling them to avoid duplication and to make the contribution of each scientist available over a wider range of simultaneous research projects. Experience has definitely established that the research results of groups of specialists working together are greater than the aggregate results of each working alone. Effective agricultural research is now being conducted by the Instituto Agropecuario Nacional under a cooperative agree- ment between the Governments of Guatemala and the United States. The technical staff at present includes seven outstand- ing specialists. Among the studies made have been soil analyses and surveys, experiments with cinchona on private plantations, chemical tests on essential oils, production and feeding trials with poultry and hogs, and research on improved strains of coffee, rice and wheat. To date, however, such work has been restricted by inadequate funds. It is the opinion of the Mission that IAN is the appropriate agency to carry out the expanded agricultural research pro- gram suggested above. It is recommended, therefore, that IAN be given adequate funds to develop such a program, including any research funds which might have been contem- plated for the Instituto Nacional de Cafe (see Recommenda- tion No. 7). To provide greater unity and to reduce present duplication, the Mission believes that the research activities of the Ministry of Agriculture in connection with cereals, soil conservation, farm mechanization and pasture improvement should be de- tached from the Ministry and merged or coordinated with the activities of IAN. IAN should work within the over-all plan- 34 THE ECONOMIC DEVELOPMENT OF GUATEMALA ning and administrative framework of INFOP and should utilize its experimental facilities at La Blanca and Cuyuta. The Ministry of Agriculture should take responsibility for functions of regulation and control, such as enforcement of laws and plant or animal disease quarantine, and should con- tinue to operate services such as the national meteorological stations; botanical gardens and zoological parks. Some of the desired coordination will be brought about by the proposed affiliation of IAN with INFOP. This should be achieved as soon as possible, since INFOP cannot be expected to promote agricultural development most effectively without more reliable technical advice than is available under the present structure. It should be assured than IAN really becomes an integral part of INFOP and not a separate entity attached for mere convenience. Promotion of large-scale agricultural projects, which in- volve financing and other activities beyond research and exten- sion work, should be considered as falling within the province of INFOP. Such projects include the mechanization program, drying and storage installations, irrigation projects and seed production farms. In all of these INFOP should follow the principle that, where developments can be handled effectively by individual or cooperative private investment, such enter- prises should be encouraged. Recommendation No. 7: Abandon the proposed Instituto Nacional de Cafe as a research and extension agency. Research and extension work on better methods for pro- duction of coffee should be of first priority in the agricultural research program of IAN and INFOP. There is no value, therefore, in creating a new and separate state organization for the same purpose. The Instituto Nacional de Cafe, if estab- lished at all, should not concern itself with these matters. Recommendation No. 8: Create an agricultural extension service under INFOP and IAN. AGRICULTURE AND THE RURAL ECONOMY 35 The best work of agricultural experiment stations is use- less unless the results reach the farmers themselves. This is an educational function which is most advantageously per- formed through agricultural extension services, which to date have been virtually nonexistent in Guatemala. It is therefore recommended that the experiment stations of IAN and INFOP be utilized as nuclei for the organization of an effective extension service. Field personnel of this service should not only carry to the farmer information on new developments, but should combat the harmful effects of ignorance, superstition and archaic custom through the teach- ing of ordinary good tillage practices. Among the most effect- ive means to this end are small demonstration plots; ultimately there should be as wide as possible a network of these, placed where they can be seen by the farmer rather than the motorist, and each related to the specific potentialities of its particular area. This work will have to be organized slowly, owing to the shortage of properly trained extension personnel as well as the traditionally suspicious attitude of many local farmers. Because it will take time, the Mission urgently recommends that this work be undertaken· immediately and be pushed forward vigourously. The research staff of IAN should cooper- ate by making its knowledge and findings fully available, although it is not desirable that these specialists themselves be drawn into extension work at the expense of their research time. It should, of course, be borne in mind that a complete extension program must be built on the existing farm, home, and community problems. This aspect is considered more fully below (see pages 74 et seq.) . Recommendation No. 9: • Encourage the technical staff of IAN to participate in the teaching of agriculture in the University. • In an agricultural program such as that recommended for Guatemala, trained personnel must form the substructure upon which research and extension activities are built. Unless the shortage of specialized personnel is remedied, the imple-  36 THE ECONOMIC DEVELOPMENT OF GUATEMALA mentation of other recommendations of this chapter will not be practicable. It has been found that those 'resposible for agricultural field work often maintain a more active interest in the progress of their work when they also teach it. On the one hand, they can bring technical competence and a firsthand knowledge of field problems to the classroom. On the other, they are kept alert to local needs through the stimulating curiosity of pupils. As a further advantage, through their field work they can assist in assuring that competent students from rural areas receive the opportunity and encouragement to prepare themselves for entering the more advanced fields of study and research. It is suggested, therefore, that one of the first activities initiated in connection with agricultural development should be the establishment of a training program for specialists in seed, plant and stock breeding research and extension field work. The program should be a part of the wo.r k of IAN, whose specialists should provide the acedemic instruction and whose experimental farm facilities will permit the neces- sary practical experience. It is further suggested that the newly organized Faculty of Agriculture of the University of San Carlos, the National School of Agriculture, and IAN should be considered as com- plementary parts of a unified agricultural education program, with close mutual relationships in all teaching, research and extension activities. 4. STATE-OWNED AND STATE-ADMINISTERED FARMS Recommendation No. 10: • Reorganize the operation of the Fincas Nacionals for greater economic return . • About 130 farms in Guatemala are owned or controlled by the Government, having been acquired chiefly from enemy aliens during wartime. Some of them are wholly nationalized, while others are merely held in possession and operated by the State. \ AGRICULTURE AND THE RURAL ECONOMY 37 • These Fincas • Nacionales represent a substantial part of the total cultivated acreagt;, probably of better-than-average quality. They produce 20 to 30 percent of the Nation's coffee and employ a correspondingly large part of the labor force. Their central administration also operates numerous coffee depulping and processing mills, three sugar mills, 10 panela (molasses) mills, a flour mill and a tannery. Many of the Fincas are handicapped by poor management, inadequate maintenance and labor discipline, and ineffective administrative and accounting practices. 4 Fortunately, the nature of this problem is fully realized in responsible circles in Guatemala. 6 The Mission believes that under satisfactory management the Fincas Nacionales could show a substantial mcrease in production and at the same time a reduction in costs. Reorganized State Operation For the greater part of the farms which are to be retained under state administration much improvement could be achieved by an integrated effort (a) to clarify the present financial position of the Fincas, (b) to remove present handi- caps created by administrative or legal rules, and ( c) to secure the most efficient managerial talent. To clarify the present financial position the Mission believes that an essential step of great practical and psychological value would be to appoint an internationally recognized firm •In the budget of the Pincas for the fiscal year 1950-51, for example, the total net profit of the Pincas Nacion.ales e lntervenidas is estimated at only 01,500,000 in round figures. Approximately 20 percent is set aside for the workers, 40 percent is put in reserve, and the other 40 percent-or roughly 0600,000--represents revenue to the national treasury. It is true that these estimates have been calculated on the basis of very conservative price estimates (030 per quintal of coffee). ·Nevertheless they appear extremely low, especially since the 1950-51 government budget anticipates the proceeds from the Pincas N acionales as three million quetzales. The wide discrepancy in estimates clearly indicates the need for accounting refolll)ls. • In the Preamble of the Law of 1949 giving autonomy to the Department of National Farms, the Guatemalan Congress referred to these difficulties in specific terms. While asserting that the public interest requires that the Pincas should always be subject to the strict control and supervision of the State, the Congress recognized that "the Government is naturally slow in adapting itself to the needs of an institution which is engaged in the production and sale of agricultural products", for such activities "require a commercial organization which can make rapid decisions to meet changing market conditions". These problems were also referred to in the Annual Report of the Court and Control Office of Accounts for the fiscal year 1947-48, which criticized sharply the financial practices of the nationalized farms, charging that some of them "constitute a serious burden on the public treasury", and that "the administration has been defective". 38 THE ECONOMIC DEVELOPMENT OF 'GUATEMALA of auditors to make a thorough investigation of the present position of the Pincas Nacionales, to set up a uniform system of accounting and to advise in the first stages of operation of the reorganized accounting department. Such an effort would go far towards removing the present obscurities in the financial status of the Pincas, which are at the root of present unsatisfac- tory conditions and which would discourage auy able adminis- trator who might be put in charge of these important properties. A second set of measures would seek to remove some of the present handicaps arising from cumbersome laws and regulations. In general, the Mission believes that the powers of the Board of Directors ·(Junta Directiva) should be reduced insofar as their. executive aspects are concerned, this body becoming more exclusively a supervisory institution. For example, the present requirement that the Board authorize purchases and sales of all products and objects whose value exceeds ~3,000, should be removed. The Mission also believes that while the control of the Court of Accounts, both by post- audit and by unexpected verifications on the spot, is an indis- pensable guarantee of orderly financial operations, this control should not normally be preventive as is required by the present law. The removal of this kind of cumbersome regulation would allow more efficiency in the management and would increase its resposibilities correspondingly. It would also make it essential that the manager selected should be a man of the highest professional competence and personal integrity. The selection of an able General Manager would probably be the most important of all measures in a successful reorgani- zation of the Pincas Nacionales. The personal qualities of the individual selected are of such importance here that the Mis- sion believes that all restricti~ns on the appointment of foreign- ers to that position should be abolished in order to secure the best available talent regardless of nationality. The Mission is confident that an able administrator with wide experience in tropical agriculture could be found for such a position. For the successful administration of a large enterprise like the Pincas Nacionales, the Mission believes that it is necessary for  AGRICULTURE AND THE RURAL ECONOMY 39 the top executive to delegate power to a limited number of high level assistant. The General Manager, when appointed, should, therefore, have the greatest authority commensurate with his responsibility in recruiting at least his immediate subordinates. The division of the Pincas into three or four administrative units, based on natural and climatic regions, would foster not only a better adaptation to regional needs but also more efficient rp.anagement. As an additional incent- ive to good administration, the Mission proposes that farm administrators should receive a certain percentage of the profits made by the farms. 6 Improvements in Cultural Practices After the thorough reorganization of management as sug- gested has been carried out, the Mission also believes that improvements, perhaps less fundamental in nature but also significant, could be achieved in the technical side of operations. The new management of the Pincas would be in a good position to introduce modern cultural practices since the large scale operations would enable it to use economically the most mod- ern methods of cultivation, processing of crops and clearing of additional land. The management should keep in close touch with the research and experimentation activities carried on by INFOP and the Instituto Agropecuario. In this way the Pincas Nacionales could lead the way in the application of new methods on a commercial scale and offer farmers all over the country a persuasive example of new practices successfully followed. The Mission also believes that more diversification is called for in the production of the Pincas Nacionales and that new crops should be tried along the lines suggested in Part 3 of this chapter. Oil-bearing grasses, for example, are a case in point. Under reorganized management with good supervision and accounting, the Mission believes that such improvements could be very largely self-financed. • The exact method by which such a percentage is to be calculated will require special study. A straight percentage of the net profits might seem logical, but is not always successful as an incentive. Since net profits are calculated after expenses, the administrator may be tempted to avoid such expenses as soil conservation work whose return is not realized immediately, and this may result in ultimate harm. Removal of long-term improvements to a separate account is one method of over- coming this influence . • 40 THE ECONOMIC DEVELOPMENT OF GUATEMALA Long Lease One possibility is to rent some of the larger nationalized farms to private operators ( either national or foreign) under fairly long leases. Contracts in these cases could provide that the State be paid a fixed annual rental plus a percentage of the net profits of the farms. Long leases are advised, perhaps up to 25 years, because without them the lessees would not care to make the large capital investments required for much- needed modern equipment and other improvements. Subdivision Another alternative is the division of some large national farms into smaller units, as part of a carefully planned program of land reform. This must be approached cautiously and objectively, however. In theory, the creation of small units would have the advantage of establishing a larger number of individual producers with a strong personal interest in the land cultivated by them. The system would be expected to . facilitate more intensive cultivation of coffee, for example, and to encourage greater <;are of the soil. But the experience of some of Guatemala's neighboring countries shows that such benefits depend upon subtle factors and are not always achieved. One factor is the actual investment of the individual. It has been shown repeatedly that land usually produces best and longest when farmed by its owner, especially when the owner has made a substantial investment in it. III. Fields for Early Development 1. CoFFEE Recommendation No. 11: Increase coffee production, as a major source of income for development. Coffee, in the opinion of the Mission, offers greater pos5ibili- ties for rapid expansion of output than does any other Guate- malan agricultural product. It also represents the outstanding • AGRICULTURE AND THE RURAL ECONOMY 41 potential source of the increased revenue and foreign exchange needed to carry out a national development program. Production Guatemala is in third place in world coffee production, ranking only after Brazil and Colombia. Among coffee export- ing countries Guatemala ranks fourth, following El Salvador because the apparent domestic consumption of coffee in Guate- mala ( over 20 percent of the production) is greater than in El Salvador. The product accounts for over 70 percent of the value of all Guatemalan exports and is the principal cash crop. ' Table XII shows the production of coffee in recent years and its disposition. The annual output has shown some fluctua- tions but very little over-all increase. It will be observed, too, that exports have rfot risen as rapidly as the estimated domestic consumption. To judge by current prices, the quality of Guatemalan coffee outranks the Brazilian coffees and equals the best of the other TABLE XII PRODUCTION AND DISPOSITION OF COFFEE, 1936-37 TO 1948-49 (Thousands of quintales, hulled and washed) Crops.ear Total Domestic Carr,• Oct.· ept. production E x ports consumption over 1936-37........... 1,382 1,014 260 319 1937-38 .. .................... 1,352 949 265 457 1938-39 ····················· 1,286 1,027 270 446 1939-40................ ...... 1,254 965 275 460 1940-41 ...................... 1,193 939 280 434 1941-42 .......... .. .......... 1,190 944 285 395 1942-43 ............ .......... 1,238 1,221 290 123 1943-44.................. .... 1,414 1,083 295 158 1944-45 ...................... 1,433 1,115 300 176 1945-46 ............ .. ........ 1,394 1,072 305 193 1946-47...................... 1,408 1,141 310 149 1947-48 ...................... 1,335 1,018 315 l~l 1948-49 ...................... 1,483 1,196 320 118 SOURCE : Oficina Central del Cafe. 42 THE ECONOMIC DEVELOPMENT OF GUATEMALA Central American or Colombian types. Guatemalan produc- tion consists mainly of the Arabica, Bourbon, Maragogipe, and Robusta coffees, of which the first two are most common. Growers have concentrated especially on the mild Arabica variety, which is in heavy demand in world markets because of its delicate aroma and the fact that it blends well with other coffee types. Many areas in Guatemala are ideally suited to coffee pro- duction. Indeed, it is now grown in all Departments of the country except Totonicapan, El Progreso, Peten, and Izabal. The most important producing areas are the Departments of San Marcos, Suchitepequez and Quezalt~ango, where the , best coffee is grown at elevations ranging between 3,500 and 5,000 feet. Coffee is chiefly a large-plantation product. While there are perhaps 12,000 producers, four fifths of the crop comes from 1,500 coffee farms, divided among some 1,300 proprietors, and with a total labor force of 426,000. The total area planted to coffee amounts to 337,980 acres, with approximately 138 million coffee trees, 85 percent of them in actual production. The development of coffee cultivation on small holdings is a distinct possibility and appears to be already taking place. It will be a task for the agricultural extension agents partici- pating in the rural development program outlined below 7 further to expedite progress in this field. Yields Information on yields is scant. Such data as exist suggest that the yield is sometimes as low as 350 pounds per acre, although the average must be nearer to 515 pounds if acreage and production statistics are approximately correct. This is apparently about 14 percent lower than the yield in El Salva- dor. The fact that the coffee of El Salvador is planted more closely may account for the difference. In any event, experiments being conducted by the lnstituto Agropecuario N acional at Chocola indicate that yields of coffee could be increased substantially without expansion of acreage. • See pages 74 et seq. AGRICULTURE AND THE RURAL ECONOMY 43 This larger yield per acre could be obtained by utilizing better strains and better management techniques. Although, on the whole, coffee has received considerable attention in national agricultural improvement plans, in the opinion of the Mission it merits more. The IAN research at ,Chocola presents a sound approach; its findings should be made more fully available to Guatemalan growers. Such research can pay large dividends, especially if increasing emphasis is given to farm demonstrations along the lines now being followed. Also, fuller use should be made of reasearch and practical experience in other coffee-growing countries of the Americas. 8 Prospects Present export prospects for Guatemalan coffee are good. Evidence indicates that the present world production of coffee is less than the effective demand. Experts have expressed the opinion that this situation can be changed materially only through a substantial increase in the number of trees under cultivation. It has been suggested by some that this would have to come about in Brazil, Colombia or Africa, and that the necessary increase would in any case require five to seven years. Admittedly in times like these, there has often been a tendency among coffee growers to overexpand production and create later periods of ruinously low prices. In view of the good demand for the Guatemalan .types of coffee, however, it seems advisable that optimum production be promoted in those areas which are competently classified as prime coffee lands. With the aid of well-directed research and extension work and the introduction of improved methods of cultivation, pr?- cessing and marketing, the Mission believes that Guatemala can increase her coffee exports from presently producing farms by 30 percent in the next 10 years. 1 In this connection, the resolutions adopted at the first Conference of Coffee Tech- nician• held in October 1950, in San Salvador, under the Auspices of the Federacion Cafetl!ra Centro America,Mexico-E/ Caribe, for interchange of information among the coffee growing countries of the area, mark an important step. 44 THE ECONOMIC DEVELOPMENT OF GUATEMALA 2. SELECTED CROPS Recommendation No. 12: Concentrate upon increased production of agri- cultural crops of prime necessity and selected ex- port items of large demand. A. Basic Foodstuffs Corn Inadequate national supplies of corn, the most basic Guate- malan food item, stem from many causes. Prevalence of sub- sistence agriculture in the highlands is one, the growing of corn on land not suited to it is another. Poor varieties con- tribute to low yields. Some improvement can be effected by the introduction of properly adapted hybrids such as those recently developed. In many areas new varieties can be, however, only palli-· atives. Corn depletes the soil rapidly and high-yielding hybrids .· do even faster. Continued satisfactory corn yields cannot ·be expected on untreated land planted continuously to this crop for a hundred years or more. Crop rotation, soil testing and fertilization will be necessary. Promotion of good soil management practices in corn culti- vation, as well as the distribution of improved seed, should be of high priority in all agricultural extension work. At Tiquisate the IAN has been carrying on an experi- mental corn-growing progrilm, in collaboration with the United Frui.t Company, with encouraging results. This and the recent experiences of other Latin American countries have shown that corn output in these regions can be increased very substan- tially in a few years by using approved methods. Most of the corn produced in Guatemala at present is grown in· primitive fashion on small plots. As soon as health and sanitation conditions in the Pacific coastal area permit, em- phasis should be shifted to mechanized production on flat lands. Assistance in land-clearing for individual farmers might be given through INFOP. Under these conditions production costs should be lowered appreciably. AGRICULTURE AND THE RURAL ECONOMY ' 45 Technical improvements in the production of corn would, however, solve only part of the problem of secaring a cheap and abundant supply of this essential foodstuff since trans- portation and marketing present other difficulties. Concrete suggestions for the improvements of transport are presented elsewhere in the Report and the general problem of market- ing and storage are discussed later in this chapter under a separate heading. The Mission might, however, stress here that in the all-important case of corn, improvements in storage, transportation and agricultural credit facilities are almost as important as increased production in creating satisfactory conditions of supply. It is essential to creat competition among middlemen at all levels through the development of public or cooperative facilities. INFOP has already carried out studies on conditions of production, transport and marketing which can be used as a basis for action. Beans Although beans are one of the principal items of the national diet, production appears to be unusually inefficient. Yields per acre-to the extent that they can be estimated without complete data- are only a fraction of what the land should yield with proper management. Increased bean production will come about through im- proved transportation, which will allow beans to be grown where they grow best instead of where they are to be eaten. Soil testing and enlightened rotation practice will help greatly, as will also the adjustment of soil fertility and acidity in some areas. Mold and insect-proof storage is needed for beans in all regions of the country. This would allow the farmer to escape the losses now experienced through drastic seasonal price fluctuations in addition to reducing losses through spoilage. As in the case of corn, problems of transport and marketing, on which INFOP has already gathered considerable informa- tion, appear to be almost as important as problems of pro- duction. 46 THE ECONOMIC DEVELOPMENT OF GUATEMALA Rice What ha: been said of corn applies equally to rice. Re- search on rice-production possibilities has also been carried on, with some useful results. The IAN in cooperation with the United Fruit Company has conducted variety trials at Tiquisate. The Ministry of Agriculture has been investigating irrigation methods. The combination and expansion of these efforts plus energetic efforts to place new varieties and new practices in the hands of farmers would be highly justified. The cultivation and marketing of rice differs from that of corn and beans in that rice must be hulled mechanically. This necessity makes for a more highly centralized form of market- ing than in the case of other crops. Owners of rice mills buy the whole crop at the time of harvest and later sell the hulled rice at much higher prices. In order to correct this situation, the development of local storage and local credit is even more necessary than with corn and beans. Encouragement of the establishment of small rice mills might also help to break the present monopolies. The solution of these marketing problems appears in the case of rice to be even more urgent than technical measures to secure increases in production. This does not mean that considerable improvement could not be introduced in the pro- duction of rice along lines already studied in detail by INFOP. Yields can be increased by the use of better varieties such as "zenith" or "blue-bonnet". IAN in cooperation with United Fruit Company has conducted variety trials at Tiquisate. The Ministry of Agriculture has been investigating organization methods. The combination and expansion of these efforts plus energetic efforts to place new varieties and new practices in the hands of farmers would be highly justified. Such devices as guaranteed minimu!ll prices to producers cannot, in the absence of fundamental improvements in actual marketing facilities, be relied upon in the light of past ex• perience. AGRICULTURE AND THE RURAL ECONOMY 47 Sugar Although sugar production in Guatemala has increased in recent years, an acute domestic shortage exists. The shortage appears to be a matter of legislation and faulty organization rather than the result of physical scarcities. Much of the domestic sugar crop is made into panela, and a large percentage of this is fermented to make aguardiente. This process unnecessarily consumes an important part of the sugar supply. Meanwhile some three million gallons of mo- lasses are ordinarily thrown away. Other countries use their molasses for fermentation; for some unaccountable reason this is illegal in Guatemala. Thus, the first step toward an adequate sugar supply is not the planting of more sugar but better utilization of what is on hand. After this, if there is still a shortage, ample addi- tional land is available for crop expansion. Meanwhile the efficiency of present cultivation and grinding can be im- proved to advantage. Wheat Experiments conducted by the Ministry of Agriculture in the experimental station, Labor de Ovalle, and by the Insti- tuto Agropecuario Nacional near Quezaltenango, as well as new wheat varieties introduced from Mexico, have already resulted in yields three times the Guatemalan average. Improved cul- tural practices, including use of fertilizers, may be expected to produce further increases in yields. On the other hand, since wheat in these latitudes cannot be produced efficiently in coastal areas, land suited to its cultivation is limited. More- over, tne desired milling qualities have been difficult to achieve in Guatemalan wheat to date. The goal in wheat culture should not necessarily be com- plete self-sufficiency, since hard wheat cannot be grown in Guatemala, but maximum efficiency of production on lands classified as best suited to the crop. A permanent deficit in 48 THE ECONOMIC DEVELOPMENT OF GUATEMALA hard wheat will always have to be made up by importation. However, if reasonable provisions are made for credit, market- ing facilities and extension services (including one full-time extension agent stationed in each wheat growing valley), it should be possible almost to double the present output on the same acreage within the next six years. It might then even be advisable to reduce the present area and to turn over marginal lands to pastures and legumes for dairy cattle. Imports of flour-which almost doubled between 1938 and 1949-can be reduced by greater wheat production; but it can also be reduced by the domestic milling of more imported wheat which can be shipped cheaply in bulk. This matter is more fully discussed in Chapter III. In the case of wheat a problem exists that in many respects is similar to the one already described for rice. Practically all marketing and storage is done by the millers who reap large benefits by buying at low prices at the time of the harvest and reselling at high prices during the rest of the year. Here again the problem of marketing appears nearly as important as the technical problems of production. It can be solved by a comprehensive approach, including storage, agricultural credit and all related measures. B. Export Crops and Industrial Crops Bananas Bananas are grown in the region of Tiquisate on the Pacific coast and in the valley of the Motagua River near the Atlantic. Like coffee, they are cultivated mostly on large plantations. The United Fruit Company (including its subsidiary com- pany, Compania Agricola de Guatemala) is by far the biggest producer and handles almost all banana exports (Table XIII). The Company plantations cover an area of 14,920 hectares. In 1949, they employed (monthly average) 13,600 Guate- malans; they paid ~9.7 million in wages and ~1,127,000 in customs duties, taxes, and social security dues. In addition to its own crop, the Company purchases the output of various small private growers. AGRICULTURE AND THE RURAL ECONOMY 49 Prospects for expansion of banana growing for export by independent producers depend largely upon adequate arrange- ments for spraying against sigatoka. The United Fruit Com- pany has already made arrangements with some independent producers under which the Company takes care of the spraying and also buys necessary supplies. Larger independent growers might install spraying services of their own, or could arrange for such services with INFOP or commercial sprayers. The feeding of bananas to hogs and other livestock is especially applicable to bananas rejected for export purposes or those grown in locations remote from shipping facilities. Unripe bananas also serve as an excellent source of starch and may be used to extend wheat flour for such products as crackers. Hard Fibers Abaca is the most important hard fiber grown in Guatemala at present. Completely an export crop, it was introduced only in recent years to help replace supplies for the United States formerly secured from the Philippines. The Guatemalan out- put (Table XIV) is all grown by the United Fruit Company for the U. S. Reconstruction Finance Corporation. TABLE XIII BANANA EXPORTS, 1939 TO 1949 Qua ntity Q ua ntity Official valuation• Year (thousands of quint als) (millions of stems) (millions of dollars) 1939 ....................... 5,135 10.6' 5.7 1940 ....................... . 4,093 8.62 5.1 1941 ........ ........ ....... . 3,429 7.2• 4.4 1942..................... .. . 2,475 5.2• 3.3 1943 .................... .... 1,255 2.62 1.6 1944 ....................... . 2,425 5.1 • 3.0 1945 ... .. .................. . 4,214 8.82 5.9 1946 .. .......... ........... . 4,810 10.7 8.7 1947... .................. .. . 6,305 13.4 11.7 1948 .. .............. ....... . 5,943 12.3 10.3 1949 ........................ 3,416 6.8 7.6 1 :Must be approxi ma tely doubled for balance-of-payments purposes. • Calculated from r eported weights. 50 THE ECONOMIC DEVELOPMENT OF GUATEMALA TABLE XIV ABACA PRODUCTION SINCE INCEPTION, 1945 ro 1951 • Producing Fiber yield Value area (pounds per Fiber production (million Year (acres) acre) (thou,and pounds ) quetzales ) 1945 ..................... . 5,599 700 3,917 1.3 1946 ... ................... 5,409 577 3,122 1.0 1947 ...................... 5,304 1,472 7,809 2.6 1948 .. .................. . 5,304 2,025 10,741 3.5 1949 .. ................... . 5,304 1,545 8,197 2.7 19501 .. .. .. .. .......... .. 5,304 1,638 8,689 2.9 1 1951 ·· · ······ · · · ········ 5,304 1,746 9,182 3.0 1 Calculated at q)0.33 per pound, estimated current value. 1 Estimated. RFC is now contemplating the financing of another 25,000 acres of abaca, of which 1,000 acres might be placed in Guate- mala. This will depend upon a number of factors, including costs. Operators have had to pay Guatemalan abaca workers relatively high rates. These and other labor stipulations will make Guatemala an unusually high-cost area for cultivation of this crop as soon a s competing areas elsewhere reach opti- mum production. Abaca can be grown by small farmers, but in the Wes tern Hemisphere only commercial machine-decortication is eco- nomical. An installation of minimum size w ould involve an investment of not less than ~200,000, which conceivably could be financed through a large cooperative. Small machines have not proven successful in nearby countries, except to provide a crude, non-uniform product for local " cottage industries". Independent growers accessible to existing large plantations can sell their raw product for decortication by the larger enter- prises, providing they allow the latter to schedule the harvest so as to assure available machine capacity each day. Abaca is a cordage fiber, not ordinarily satisfactory for coffee bags. Kena£ (Hibiscus cannabinus L.), an excellent sub- stitute for jute, is being planted increasingly in the Caribbean countries. This plant should be grown experimentally in Guatemala at once, for at the present stage of its research elsewhere it is virtually certain that it will become an important bagging material. It is suggested that Guatemalan studies be  AGRICULTURE AND THE RURAL ECONOMY 51 concentrated on its local cultivation and seed production. Large-scale mechanization studies are already well advanced in Cuba, with the collaboration of United States technologists. Satisfactory spinning and weaving mill tests have been made and need not be repeated. There is already a market for the fiber in the United States. Essential Oils In recent years Guatemala has become the world's largest producer of citronella oil and the second largest supplier of lemongrass oil. Much of this progress can be attributed to the excellent • work of the essential oils producers' cooperative, Oficina Con- troladora de Aceites Ensenciales. This organization, composed of some 70 producers, has done much to raise the efficiency of production and to standardize quality for export market ac- ceptance. It should serve as a model for similar organizations • in other fields of production. Further progress can doubtless be made in meeting en- larged market demands for these oils and probably other essential oils could be produced as well. Experiments are now being conducted with geranium and patchouli. Lavender, peppermint and wintergreen might be tried in the temperate highlands. Present research on improving the utilization of the spent fibrous residues of citronella and lemongrass for making cardboard or paper should be continued. Cotton The 1950-51' cotton crop is not expected to meet more than one third of the country's domestic needs. So far, too few data from different areas have been available to determine with sufficient certainty the average costs of mechanized cotton production. Until more conclusive data can be obtained it is not possible to solve the question of whether imports from El Salvador and elsewhere may not continue to be necessary despite the recent and technically successful efforts to develop mechanized cotton production. Preliminary cost estimates, 9 however, based on a two-year • Quoted by Juan U . Maegli, op. cit.  52 THE ECONOMIC DEVELOPMENT OF GUATEMALA experience of mechanized cotton growing in southern Escu- intla, have shown considerably lower costs per pound of ginned cotton in favor of the domestically grown product. The fact that local production has not expanded faster may partly be explained by the handicap of ceiling prices. The experiences of INFOP at Cuyuta and that of others in Guatemala and El Salvador have demonstrated many of the problems and possibilities of growing cotton; this experience plus a careful study of unit costs should be utilized in deciding on expansion. There is no apparent technical reason why Guatemala coulrl not become self-sufficient in cotton production within the next six years. • The fact that the cultivation of cotton is a new industry in Guatemala and one initiated largely by a public organization, INFOP, makes it possible to avoid some of the unhealthy • marketing conditions which we have described in the case of basic foodstuffs. Through INFOP the findings made in Cuy- uta and elsewhere should be made available to small producers who should as early as possible get the benefit of the expansion of the mechanization program of INFOP discussed below under Mechanization. The grouping of small producers in cooperatives is particu- larly necessary in the case of cotton because of the problem of insect control. This problem is created by the small pro- ducers who have pieces of land under cotton and do not treat it with insecticide. It may become necessary to pass the type of legislation found in El Salvador, Peru, Argentina and Mex- ico. Cooperative grouping of producers, apart from the ques- tion of insecticides, would have many advantages for ginning, orderly marketing and price negotiations. Cacao Cacao is at present a crop of only minor importance. Pro- duction is limited to the San Antonio region of Suchitepequez and (under unsatisfactory conditions) the Polochic Valley. Yet, with the use of selected strains and with access to the world market, cacao could be an excellent cash export crop for small farmers. AGRICULTURE AND THE RURAL ECONOMY 53 Plant diseases which have wrought havoc with cacao in other parts of the world have not yet appeared in Central America. Moreover, there is a great deal of good virgin soil suitable for cacao in Guatemala. The north coast, near Banan- era, is one promising region; cacao production might also be rehabilitated in the Polochic Valley and other parts of the Verapaces, and tried in Peten. Because of the relatively long harvest season, planting on small family-operated farms may minimize labor problems. World market conditions for cacao appear promising for many years. Unless growers are permitted to benefit from favorable world prices, however, they cannot be expected to increase plantings or to put forth any effort at improved quality. Unrealistic ceiling prices and export restrictions have harmed production and it is the Mission's opinion that such controls" should be avoided. Voluntary formation of an association of cacao producers is also suggested. In addition to promoting the general welfare of its industry, such an association would be helpful in support- ing research and in distributing superior cuttings or budwood for higher yields and improved quality. Vegetable Oils• A rather complete analysis of the Guatemalan vegetable oil situation has been published recently by FA0. 10 Pointing out that domestic deficiencies are not large, the report suggests increased production of sesame and peanuts to supplement present supplies of edible oils. Cottonseed and sesame are now used, but domestic peanuts are not ordinarily crushed. The FAO report also recommends development of African oil palms, sunflower, corozo and linseed, if feasible, and men- tions calathea lutea as a source of hard vegetable wax. It suggests the possible gathering of wild oil-bearing nuts in the Peten, and recommends detailed field surveys and research to determine the availability and uses of native oil seeds. ° 1 K. S. Markley. A Survey of Oils and Fats in Guatemala, (Washington, D. C.: Food and Agriculture Organization of the United Nations, June 1950) mimeographed, 30 pp. 54 THE ECONOMIC DEVELOPMENT OF GUATEMALA It seems reasonable to assume that demands for edible vegetable oils may be met best by greater sesame production on the Pacific coast. This may soon be induced by rising oil prices. The gradually rising cotton output will also help, as most of the cottonseed is crushed for oil. For soap and drying oils the problem is more complex and will require research as suggested above. 3. MECHANIZATION Recommendation No. 13: Expand INFOP's farm mechanization program as rapidly as trained operators become available. Mechanized farm practices have two distinct effects upon the agricultural economy. One is an increase in the produc- tivity of the farmer himself, who thereby earns more for his labor and can pay higher wages if he is an employer of addi- tional farm help. The other is an increase in the productivity of the land, for mechanical power can us~ally do a better and more uniform job of plowing, cultivating, terr.-.:ing and similar operations. Mechanization is not the only way to increase production, nor is it absolutely necessary; but it is essential if increase in production is to be coupled with a significant rise in real income for the agricultural worker. It is recognized, however, that mechanization involves a heavy investment. Also, it is more adaptable to some crops than to others and is less feasible on steep highland slopes than in areas such as the Pacific coastal plains. Prospects and Pitfalls Farm mechanization in Guatemala has already had a fairly thorough trial at Tiquisate and a few other places. A mech- anization center has been set up by INFOP at its experimental farm in Cuyuta, with a companion training school for oper- AGRICULTURE AND THE RURAL ECONOMY 55 ators and mechanics.11 A commendable beginning has been made in the mechanization of sugar cane production and prog- ress is also being made in mechanized cultivaticn of citronella and lemongrass. Because of the initial cost, it will probably be a long time before very many farmers can afford to own farm machinery outright. Yet if the machinery is made available, they can afford to hire its services at reasonable rates. Service of this kind may be provided through machinery pools maintained by public or private agencies, or by private farmers on a "custom" basis. If properly operated, publicly owned machine stations, such as the present INFOP centers, may be one of the best means of initiating mechanization. Following this, private or cooperative machinery stations may develop, util- izing the experience gained by the INFOP centers. These private operations may have the advantages of being more flexible than those of larger publicly owned stations and also of avoiding the immobilization of an unnecessarily large amount of public investment funds. When private operation develops in a new area some super- vision by a public authority may be necessary, both to prevent exorbitant charges by cu~tom operators and also for an im- partial test of the differePlt types of machinery in the local environment and for local needs. Machinery pools which lend equipment without skilled operators are usually unsuccessful. A tractor operated by many different people-none of them representing its owner- is soon ruined. Thus the spread of good mechanization in its initial stages is probably limited more by the supply of trained 11 See Proposed Outline and Recommendations for I nstaTiations and Operation of Machinery Stations in Guatemala presented in August 1949 to INFOP by Mr. Allen S. Gordon of the Land Use Branch, Agriculture Division, Food and Agriculture Organiza- tion of the United Nations. After making a detailed survey at the request of INFOP 1 Mr. Gordon recommended that INFOP "start with one complete station, to be followea by others at different locations throughout the country as the program progresses". The functions of the center or centers would include: preparation of land for crops, clear- ing, cultivating, plowing, harrowing, sowing, etc., on a custom rate basis; the establish• ment and operation of a training school for operators and mechanics under the supervision of the National Agriculture School; the sale at reasonable prices of necessary machinery for agricultural mechanization to farmers wishing to purchase equipment, if necessary on long term credit; distribution of better seeds to farmers at reasonable cost; and, insofar as possible, advice to farmers on improved agricultural practices. Each center would have substations at points too distant from 1':a.e center to return machinery to it daily. • 56 THE ECONOMIC DEVELOPMENT OF GUATEMALA operators and maintenance mechanics than by the machines or the need for financing. Suggested Expansion The Mission believes that the mechanization program of INFOP should be expanded progressively as personnel per- mits. In addition to the machinery and operator-training center at Cuyuta, one other similar center should be set up in the south coastal region at this time and a third should be established in another year. Still others may be indicated as the program advances and experience is gained. The financing by INFOP of progressively minded young machinery operators (trained in INFOP centers) or of local cooperatives appears to be the best means to develop other machinery service ceqters. INFOP, in financing such ventures, can exercise a degree of control on charges through stipula- tions in the loan agreements. As trained operators are pro- duced in greater numbers, it may even be possible later to interest private or cooperative capital in taking over some of the existing centers, thus freeing INFOP's capital for new enterprises elsewhere. The Mission is of the opinion that the present mechan- ization program of the Ministry .>f Agriculture should be absorbed into that of INFOP. By itself, the Ministry's project has been a small one, inadequately financed, and of only limited benefit to a small number of farmers. Any facilities at its disposal can be of greater service if combined with those of the more extensive program. While increased use of mechanical power and improved · farm equipment is essential if increases in output per man are to be realized, it must be recognized that mechanization in- evitably changes the way of life of the people concerned. For instance, other things being equal, mechanization will be taken up first on the best lands and with the larger-sized farm businesses. The advantage which these farmers have over their less fortunate neighbors may be enhanced to a point where the competition is ruinous. On the other hand, it is apparent that investment is mosl justified where .it will produce the AGRICULTURE AND THE RURAL ECONOMY 57 greatest increase in production. There is no complete solution to this problem, but, under conditions existing in Guatemala, resettlement of farmers from poorer lands may solve much of the problem if it is foreseen that mechanization and the appli- cation of technology in general will increase the disadvantage of those farming under naturally adverse conditions. Ma- chinery service supplied by a public agency at cost may provide mechanization to some of those who can use mech- anization but cannot afford to purchase tractors and equip- ment. • 4. MARKETING Recommendation No. 14: Improve facilities for marketing agricultural prod- ucts. EHects qi the Present System Guatemalan marketing methods for farm products are slow, cumbersome and wasteful of both materials and labor. The small producer transports his limited marketable surplus over long distances, frequently under his own power, with great loss of time. He then either spends more time in retailing his goods personally, or else sells them to a middleman at a price over which he has little or no control. The latter is the more common practice. For lack of storage facilities (as well as credit) the farmer is forced to sell his crop soon after harvest. This season, naturally, tends to be a period of depressed prices. The middleman acquires the crop at these prices, perhaps already holding a lien against it for credit advanced to the farmer earlier at exhorbitant rates. The middleman may then take care of transporting the crop to urban markets, reaping a large profit in the process. Later the farmer may have to repurchase some of it for his own needs, paying the increased prices. Slow movement and poor storage results in a large loss of some crops by spoilage, effectively reducing the total agri- cultural output and diminishing the purchasing power of the producer. A major incentive to restore this loss by higher 58 THE ECONOMIC DEVELOPMENT OF GUATEMALA production is lost, because under the marketing system the producer is the last to receive any benefit from increased price. Inadequate and expensive transport (for which remedies are suggested in Chapter V) is perhaps the most basic of marketing problems. Next to this is the unsatisfactory market- ing system itself. In improving it, the objective should be to make it possible for the farmer to sell to competitive buyers, at such time as he may choose. Suggested Improvements One means to this end would be the.;i.doption of cooperative marketing methods. The progress made by the Citronella Association in Guatemala serves as an illustration of what can be accomplished by this method, not only in commanding more satisfactory prices but also in standardizing quality for better market acceptance. In appropriate areas, it is likely that similar cooperatives of small producers of other crops could)>e spon- sored to advantage. Facilities for better crop storage-to reduce losses by insects, molds, germination and rot, and to minimize the effects of seasonal price fluctuations--can be promoted in a number of ways. Individual farmers can build their own if their operations are large enough and if the necessary technical information is made available to them. Farm cooperatives, also, can install them for the collective use of their groups. Others can be erected and operated by INFOP, or by agencies under INFOP financing. Guatemala has already studied what some of the other Latin American countries have done to help this situation. The methods now used in Costa Rica, providing public storage for grains at small charges to cover operating costs, indicate the possibilities. Although central storage in the capital is important, storage on farms and in local communities is the primary need. Such storage serves best to allow producers (or producer associa- tions) to participate in the harvest-to-harvest spread of prices and avoids the necessity of transportation both to and from central storage. AGRICULTURE AND THE RURAL ECONOMY 59 INFOP has made a beginning by establishing a first local unit at Cuyuta, to handle the production of its own farm and its neighbors. This will provide experience for the creation of others. As many as 20 could be constructed over the next five years, the type of each dependent upon the major crops to be accommodated. Drying and disinfecting equipment will be needed in some, moderate refrigeration in others. 5. AGRICULTURAL CREDIT Recommendation No . 15: Plan to develop more effective credit facilities for small agricultural producers, as soon as possible after the forthcoming F AO and UN economic studies in Guatemala. From the foregoing discussion of marketing conditions, it is apparent that existing credit facilities for the small Guatemalan farmer are not satisfactory. He has difficulty in the purchase of better seed, livestock and equipment essential to improved production. The local storekeeper or middleman is usually the farmer's only source of credit and this situation is open to abuses. Nor is it likely that other farm credit on a com- mercial basis will appear in the near future. In recent years, several efforts have been made to extend greater credit facilities to small rural producers through rural credit agencies and credit cooperatives. These have been organized, for the most part, by central government agencies lacking close contact with rural communities and without enough competent personnel. That such attempts have largely failed must be laid not only to 'Jack of experience but to the fact that under existing conditions credit facilities are of little value unless accompanied by improved production and marketing. Further Stuqies Scheduled Specialists of the Food and Agricultural Organization and the Department of Economic Affairs of the United Nations are expected to visit Guatemala early in 1951 to advise the Government, through INFOP, on the development of rural 60 THE ECONOMIC DEVELOPMENT OF GUATEMALA credit programs. Their counsel will be based upon experiences in other Wes tern Hemisphere countries such as Mexico, Para- guay and Venezuela, where problems of a similar nature have been encountered. The Mission feels, therefore, that to em- bark on any large-scale rural credit programs without the benefit of these new studies would be rather premature. By the same token, the Mission feels that its own observa- tions in this field should be presented, not as formal recom- mendations at this time, but as suggestions to be considered finally in the light of those to come from the F AO and UN advisors. Suggestions Responsibility for development of rural credit is at present divided among the Department of Cooperative Development, the Agencies and Branches Section of INFOP, and the Credito Hipotecario Nacional. The Mission feels that the record of the Department for Cooperative Development cannot justify its continued existence as a separate agency. It seems clear that INFOP has superior facilities for bringing about the much- needed coordination of research and extension work, promotion of cooperatives, and the organization of marketing and rural credit. The Mission therefore believes that INFOP should be put in charge of the rural credit program in all its phases. For the same reasons the Mission advises against the creation at this time of a separate Agricultural Credit Bank. Whatever additional funds may be made available for agri- cultural credit to small producers and for mechanization, research or demonstration . work, should be administered through INFOP in accordance with a carefully planned long- term development program. Furthermore, the Mission feels that at this time Guatemala does not have the necessary personnel for an ambitious agri- cultural credit program. Accordingly, for the . time being, INFOP should limit its rural credit operations to a series of experiments in a few selected communities. At the same time, the greatest possible number of rural credit agents and organizers of cooperatives should be trained, either in Guate- AGRICULTURE AND THE RURAL ECONOMY 61 mala or in other Latin American countries. This program should expose the trainees to practical work designed to ac- quaint them with the kind of concrete problems which they will face later. It is suggested, finally, that further efforts to establish credit cooperatives be postponed until experience in the demon- stration communities clarifies the possible functions and neces- • sary procedures for such organizations. 6. l.IvESTOCK Recommendation No. 16: Increase livestock production. ' The principal methods suggested are: (a) Improvement of management practices; (b) Development of feeds and pastures; ( c) Eradication of diseases and pests; ( d) Selection of breeding stock appropriate to each area and use; ( e) Creation of processing outlets; (f) Review of restrictive legislation. Meat consumption by the bulk of the population is ex- tremely low; nor has there been any appreciable increase in consumption per capita over the last decade. As will be seen from Table XV, total slaughter in the Republic has shown very small gains, largely offset by population growth. Further- more, 1949 slaughter of livestock other than beef actually dropped below the level of some early war years. Price controls and export prohibitions on cattle and beef appear to have had, as their most obvious effect, the dis- couragement of producers. Development of the livestock industry has been below normal for the national economy and a loss of foreign markets has not been compensated for by any more meat for the local citizen. It is clear that an expansion of this phase of agricultural production is highly desirable, not only for a greater meat  62 THE ECONOMIC DEVELOPMENT OF GUATEMALA supply but for its effect upon numerous dependent industries such as tanneries, shoe and leather goods factories, wool textile operations, feed mills, dairy product plants and meat canneries. Beef Cattle • Under improved management and with relief from current restrictive legislation, the cattle population could increase rapidly. According to a recent study of the problem, 12 "If about half of the total present and potential area of cultivable land on the south coast were in pasture for rotation, with land m TABLE XV CONSUMPTION OF LIVESTQCK, 1938 TO 1949' , Year Cattle Other Livestock 1938 .. .......................................... 122,600 197,000 1939.................................... ....... . 123,900 193,700 1940 ............................... .. .......... . 113,000 209,000 1941 ..................... .. .... ........ ......... 99,400 238,600 1942.... .. ..................................... . 110,200 256,300 1943 .......... .......................... ... ..... 125,200 259,300 1944........................................ .. . 125,100 226,500 1945 ......................................... .. 137,000 193,600 1946........................................... . 135,800 216,500 1947 ...................................... ...... 143,100 247,300 1948 ........................ .. .............. .. . 155,900 267,400 1949............. ...... ............... .. ........ 159,000 243,300 1 Although slaughter statistics do not distinguish between all types of animals, the 1947 census showed the following livestock population: SouRcE: Ii Direcci6n General de Estadistica. •••••••••••••••••••+••••••••••••• :7r•••••••••••••=••••=•••••• cultivated crops, with adequate prov1s1ons for year-long • •••• l!!:ffl grazing, cattle production could be at least five times as great as it is now . . . Most of the guinea grass pastures ( on the south coast) are very much undergrazed ... Present pastures, generally, should carry twice as many cattle as they are now carrying. Actually, doing this would of course depend upon 11 Arthur T. Semple, Gr1Uing Land Improvement and R elated Problems in Guate• mala, 1949 (Food and Agriculture Organization of the United Nations) . See also, by the same author, Grazing Land Improvement Problems in Guatemala, 1950,  • AGRICULTURE AND THE RURAL ECONOMY 63 measures to provide for the cattle during the dry season". On the abandoned banana lands in the lower Motagua Valley on the north coast, according to the same source, "It is pos- sible, with good management to carry one head of cattle to about one acre of guinea grass the year round". For the immediate future the Pacific coast offers the best prospects for beef cattle production, and in fact the in- dustry is at present largely centered in this area. The com- bination of good soil, ample water supply and transportation facilities favor it over the more remote and drier upland· areas. The north coast, of course, has the one advantage of a reason- ably ample rainfall during most of the year. Eventually the development of the Peten may open new grazing areas; but this region cannot become profitable for cattle-raising until its transportation system is built. Cattle can be driven long distances to market on foot, but they often lose so much weight en route that the grower loses money on the trans- action.13 One problem in the lowlands at present is the cost of clearing additional land for pasture. For this it is suggested that INFOP cooperate with equipment suppliers and land- owners, testing the relative costs and advantages of various procedures for clearing. There are new developments in both mechanical and chemical methods. Guinea grass and several other common pastures are popular in Guatemala and serve well. Others, such as Para, Jaragua and Bahia, should be tried for comparison in suitable areas. A supply of tropical Kudzu,, now being tested at Cuyuta and Chocola, should be made available for field planting. Additional legumes and grasses should be tested through IAN experiment stations. Pasture lands should be mowed to prevent weed infestation, whether mowing for hay is desired or not. This should be done at the proper time of year, before these plants can form seed. The practice keeps a purer stand of grass and increases 11 This is not the only loss. The quality of the meat suffers, the hides are damaged, and some cattle ma[. be lost. Long-distance driving of cattle frequently develops hoof troubles, and inter eres with their travel. The practice can also contribute to the spread of tick infestation and other pests and diseases from intervening areas. 64 THE ECONOMIC DEVELOPMENT OF GUATEMALA the carrying capacity of the land. Pastures should not be over- stocked, however, and should be rotated systematically to pre- vent overgrazing and consequent erosion. Cattle of approximately SO percent zebu blood, such as now raised in the Pacific coastal area, are fairly satisfactory for beef ( although not dairy) production and seem well adapted to this lowland region. Yet undoubtedly they can be im- proved by further selection. It is suggested, therefore, that most breeding stock be selected within the existing type, rather than from imported foreign breeds unadapted to the ecological conditions of the Pacific lowlands. It is recommended that a careful study be made of current management practices, with the object of determining what changes would increase the percentage of calves and decrease mortality among growing stock. Corollary studies should be directed toward control of ticks, parasites, and especially cattle diseases. At the present time these improvements are more urgently heeded than improved breeds of beef cattle. Dairy Producta Very little milk is consumed by the rural population of Guatemala. The demand is increasing in the cities, however, and Guatemala City is now reported to have less than half the milk required to meet its minimum requirements. Dairy products valued at about one million dollars were imported in 1949. It is apparent that the country's output of milk and milk products should be increased in volume and quality. In this latitude, dairy cattle probably should be kept in altitudes above 2,000-3,000 feet. The highlands of the Depart- ment of Guatemala are especially suitable, since their climate and soil conditions permit the use of high-producing foreign dairy breeds, the introduction and development of which should be encouraged. Brown Swiss cattle seem to be among the most suitable for crossing with native stock, but in these altitudes in the tropics some dairymen have had good success with Holsteins, which give a much greater ·volume of milk at a slightly lower AGRI CU LTURE AND THE RURAL ECONOMY 65 (3.5-4.0 percent) butterfat content. The so-called "dual- purpose" herds should be avoided; as a rule they are equally unsatisfactory for either meat or. milk. Dairy cows do not produce well unless properly fed and watered. Improved pastures and forage for the dry season will be necessary; but, in addition, cows must receive supple- mentary protein and other elements of a balanced diet. Among the various possibilities, it is probable that a high-protein yeast feed can be made commercially from the coffee wastes of the beneficios (mills) and it is certain that one can be made from molasses. Some local dairymen have recently had discouraging ex- periences in attempting to face a combination of deficient pastures, labor conflicts and ceiling prices for milk. It appe.ars that at least partial relief from these troubles will be required if dairy production is to be increased. The Mission believes that construction of the proposed co- operative pasteurizing plant and creamery, under the auspices of INFOP, should proceed as planned. Its administrative board should work closely with the dairy improvement program of INFOP and IAN. Sheep The sheep industry, tn the temperate highlands, can be expanded, to ad vantage. Wool is the most significant product in this instance, since an outlet for it exists in the local manu- facture of woolen rugs and the Indian handicraft industries. Introduction of imported breeds of sheep should be under- taken with caution. Because the wool from different breeds varies in properties, the aim should be to select the breed which will best satisfy the requirements of the above-men- tioned industries. The improved Navajo breed now being tried offers interesting possibilities. At the same time, if domestic wool production is expected to supplant imports, it will be necessary to promote the estab- lishment of adequate commercial wool-washing facilities. To meet Guatemalan needs a single modern plant-rather than several small ones-would be desirable. In this way it might  . 66 THE ECONOMIC DEVELOPMENT OF GUATEMALA be commerci11lly feasible to recover lanolin as a by-product for sale to the cosmetics industry. Inasmuch as both the properties and quantity of wool produced are directly influenced by the nutritional level of the sheep, an appreciable increase in the present wool produc- tion could be expected merely by improving pastures and supplying those minerals in which the diet is deficient. Atten- tion should be given also to control of parasites and particu- larly head grubs, which at times cause severe losses. Small-scale work in these problems has been started near Quezaltenango by IAN and the Ministry of Agriculture and should be continued. The findings already demonstrate that wool improvement can be accomplished through better man- agement techniques and proper feeding in the dry season. Sheep can be raised successfully on relatively low-grade land, and sheep production on the better soil types usually represents an uneconomic use of resources. It is, however, important to avoid overgrazing of mountainous slopes-an everpresent danger with sheep, as they crop the grass at ground level on overstocked pastures. Signs of overgrazing and con- sequent soil erosion are already evident in some zones. Hogs Swine production is not, in general, conducted on a com- mercial basis. Individual farmers frequently maintain a few hogs of nondescript breed and feed them odds and ends or allow them to forage for themselves. Corn is raised for human food rather than for conversion into meat, and its extensin:: diversion to hog feeding is unlikely in the near future. Gains in hog production may be stimulated by the use of off-size, nonsaleable bananas as a carbohydrate feed, to be supplemented with protein and fats from other sources. Oil- seed cake from an expanded vegetable oil industry would be helpful. At Chocola, IAN has had some success in feeding bananas with oil or meal from corozo palm nuts and sesame, in various combinations. 14 "Sec Robert L. S9uibb, "Native Foodstuffs Dcvclo1>_cd by Guatemalan Research", Foreign Agriculture, XIV, No. 2 (Washington, D . C. Feb. 1950), p. 37.  • AGRICULTURE AND THE RURAL ECONOMY 67 Poultry Present production of poultry and eggs is essentially con- fined to small farm flocks. It is only recently that a few com- mercial poultry enterprises have been establish~d in the vicinity of Guatemala City and these tend to be handicapped by the high cost of imported feeds. Development of successful commercial poultry plants de- pends upon suitable climate, availability of properly balanced feeds, and accessibility to market, among other factors. The semiarid regions around Salama, Zacapa and El Progreso would be well-adapted to pbultry production-especially the first two, which have frequent air service for delivery of day- old chicks. In its current research program, IAN is attempting to de~elop inexpensive balanced poultry feed mixtures from local materials. The almost complete lack of a fishing industry, which could furnish fish meal as a valuable by-product for this purpose, is a handicap. Research should continue, how- ever, and should lead eventually to the creation of a more satisfactory domestic livestock feed industry. Meanwhile, a better dissemination of information among farmers would allow them to mix their own feeds more intelligently from available materials and should result in higher egg and poultry production from present flocks. 7. FOREST PRODUCTS Recommendation No. 17: Apply modern conservation practices to forests for sustained-yield production of timber and secondary products. A recent authoritative survey report 111 states that, "the future possibilities of forestry developments in Guatemala are almost unlimited," provided that appropriate measures are taken to preserve this important resource and to promote its ,. L. R. Holdridge and others, The Forests of Guatemala, (Turrialba, Costa Rica, 1950) . This report, prepared for INFOP by specialists of the Inter-American Institute of Agricultural Sciences, provides a complete review of the forestry situation in the Republic. 68 THE ECONOMIC DEVELOPMENT OF GUATEMALA systematic utilization. The statement is undoubtedly true. It should be interpreted, moreover, to include not only the cut- ting of virgin wood but also the exploitation of specially planted stands and the extraction of numerous gums, oils, resins, tannins, drugs and similar valuable materials of com- merce. Timber Recommendations of the Holdridge report should serve as the basis for a sound program of forest management and · exploitation. This and other studies suggest that the Peten alone could produce about 20 million board feet of cabinet wood annually on a sustained-yield basis. Extensive government holdings of forests and the forest lands included in the national farms should be utilized for systematic cutting. State acquisition of larger holdings in the coniferous forests at middle and higher elevations would be desirable to make possible more intensive forest exploitation as well as reforestation of denuded areas. More systematic management of communal forest lands would permit their better conservation, and at the same time would supply large quantities of wood products through the normal harvest of thinnings and mature trees. Present activities of the government forestry service (Directorate General of Forestry of the Ministry of Agri- culture) relating to control of cutting, protection against fires and other destructive factors, and the production of nursery stock, should be continued and intensified. For fire control and the replacement of timber resources, it will be essential to obtain the support of landowners and the general public through a broad educational campaign. Demonstration plots along roads and trails and other field demonstrations should acquaint farmers (including those unable to read) with forestry aims and methods. Additional technical forestry information, including data on growth and yield for various species, should be distributed as guides to private landowners and for the spread of a better management policy for the nation's forests. The services of trained foresters from abroad should be sought for assistance in this work. AGRICULTURE AND THE RURAL ECONOMY 69 Basic forestry policies should emphasize constructive work rather t_h an mere excessive restriction as has been tried in some other countries. An army of inspectors stopping lumber trucks will not in itself cause any more trees to be planted, nor will it even stop illegal cutting. The Poptun region should be put under organized forest management; if plantations were established, this could serve as a good lowland center for tropical hardwood forest studies. At the national Finca El Pino, a similar center for highland timber could be developed. Better prices for woods and manufactured wood products can probably be secured with the aid of credit to local lumber- men. Much of the wood is not properly seasoned at present, chiefly, perhaps, because holding it for seasoning ties up large amounts of working capital. Bamboo Increasing interest in bamboo is evident throughout the Western Hemisphere in recent years. Among the many types, some are now utilized commercially for paper-making in India and the Philippines, and others for various structural uses. Bamboo grows rapidly, and certain varieties are espe- cially suitable for reforestation of denuded hillsides. Adaptability of some bamboos to Guatemalan conditions has been shown by the plantings of the United Fruit Com- pany in the lower Motagua Valley, and also by the coopera- tive IAN project in the Polochic Valley. It should be remem- bered, however, that all varieties do not have similar prop- erties. For example, paper can be made successfully from a number of varieties, but with others it is completely un- economical for chemical reasons. Expert advice is essential in contemplating industrial utilization. Chicle and Chilte Chicle, best known as a base for chewing gum, is at present Guatemala's most important forest derivative and is harvested almost entirely for export. Unfortunately, the prospect for continued / production at present levels is not bright. The output of many trees has 70 THE ECONOMIC DEVELOPMENT OF GUATEMALA been reduced or exhausted by repeated tapping without proper rest periods, tapping of branches and under-size trees, and other abuses. Many of these destructive practices were stimu- lated by high wartime prices. Forest fires have also taken their toll. Irregular supplies have led the major foreign buyers to invest heavily in technical research to produce substitutes. The large wartime demand intensified this work. Several suitable natural and synthetic materials emerged and are now in com- mon use, although there is still a slight margin of preference for the natural chicle. If there is any hope for this activity, it seems to lie in the production of certain natural substitutes which might be ob- tained more economically. At the moment the most promising of these is chilte. This tree-a native of Mexico, where it grows wild in profusion-yields a latex rather similar to chicle. \ While the chicle tree ( Achras Zapota) requires 25 years of growth before commercial tapping, chilte is a fast-growing plant which can be tapped in its first year. It lends itself to cultivation in plantations, is propagated from cuttings or seeds, and can be planted at a density of 600 to 800 per trees per acre. A lowland type (Jathropha tepiquensis) is reported best suited to commercial exploitation, growing as much as six feet the first year with from 30 to 50 inches of rainfall. Experimental planting of chilte is being conducted in Cuba, the Dominican Republic, Haiti, Nicaragua and Puerto Rico. The Mission believes that similar experiments should be started in Guatemala, with a view to its cultivation in parts of the Pacific coast region and possibly Poptun. Rubber Nevea rubber is now being grown experimentally at the Firestone rubber station at Retalhuleu, and by the Experi- mental Station of the U. S. Department of Agriculture at Cuyutenango. The Mission is informed that within the next year an initial 100,000 pounds of rubber could be exported from existing stands, with an estimated yield of 1,000 pounds of rubber per acre per year. It is further estimated that within  • AGRICULTURE AND THE RURAL E CONOMY 71 the next six years a total of 2,000 acres could be brought into production. At the end of the six year period, assuming a relatively conservative price of 30 cents per pound, the value of crude rubber produced annually would amount to about $600,000. Under present world conditions it seems likely that the United States, Mexico, Cuba and some other nearby coun- tries will offer a remunerative market for any Guatemalan rubber for some time to come. Currently, the Cuyutenango Station is encouraging the growing of rubber trees on small family farms on the west • coast. These are individual plantings of relatively few trees each, with intercropping of other types to help finance the venture until the trees can be tapped. In this form rubber may well be a good complementary crop, for it can be tapped in years when market prices are sufficiently attractive, yet the farmer need not be dependent upon it. The Mission believes that similar operations are desirable in the lower Motagua Valley. Tannins and Extracts Guatemalan forests-especially in the hardwood regions- are known to contain a great variety of trees and plants yield- ing valuable tannins, oils, gums, drugs, natural dyes and ex- tracts. For the most part any present utilization of such products (other than chicle) is limited to crude processes or local herb medications. Development of these potentially important industrial ma- terials will require exploration and research. Such studies should be made a continuing part of any laboratory research program dealing with natural resources, as has been contem- plated by INFOP. 8. huuGATION Recommendation No. 18: Limit public irrigation, for the present, to small experimental projects and collection of basic tech- nical data.  ' 72 THE ECONOMIC DEVELOPMENT OF GUATEMALA The Role of Irrigation Irrigation, in many respects, is a last resort to be used only when it is really necessary. In a national development program a country may need it if there is a general shortage of arable land and some of it does not receive sufficient rainfall. Even without a shortage of land, it may be helpful if there is some powerful economic'. or social reason why a certain dry region should be developed ahead of others. Where there is enough total annual rainfall but its distribution is highly seasonal, the crop gain from irrigation in relation to its higher cost usually can be determined only by experiment. In other words, irrigation does not always pay. Guatemalan experience with large-scale irrigation to date has been limited to the operations of the United Fruit Com- pany and its subsidiary, at Bananera and Tiquisate, respec- tively. While the results have been interesting and indicative of the possibilities in these areas, it should be noted that these installations were made under unusual conditions and to meet a very special need. Two irrigation projects-La Fragua, affecting some 40,000 acres, and San Jeronimo with 12,000 acres-have been under study for some time by the Government and others. Some expenditures have already been made on the San Jeronimo project. A third and smaller project at San Pedro Pinula has already been largely completed. As far as could be observed by the Mission, it would appear that the interest of the Gov- ernment in these projects is not motivated primarily by any plan to increase the over-all national production, but by the desire primarily to raise the standard of living in these partic- ular areas by a greater output of the usual subsistence crops. The soils of the San Jeronimo area appear to be of good physical texture and sufficiently uniform to benefit from irriga- tion. A year or two of study, using the small amount of water now available, should demonstrate the extent to which invest- ment in irrigation for the area would be likely to pay. La Fragua is an area of extreme variability in soil type. A careful analysis of the current soil survey will be necessary AGRICULTURE AND THE RURAL ECONOMY 73 before a decision can be reached as to the feasibility of attempt- ing irrigation on a large scale. Limited Prospects The Mission believes that the prospects for national bene- fit from irrigation are brighter in the Pacific coastal area than in other regions. Although one crop per year can be grown by dependence on the rainy season, it is likely that irrigation would eventually pay over much of this area. Aside from obtaining two harvested crops per year, the possibility, under irrigation, bf growing a soil-building crop should be consid- ered. In view of the future importance of the southern coast, it would be desirable to concentrate any irrigation studies and experiments in this· region in the near future, rather than at more doubtful locations as La Fragua and San Jeronimo where the feasibility of commercial cultivation of high-value crops is still unknown. Furthermore, such work should be kept to an experimental scale until there are sufficient data to demonstrate the wisdom of large installations. Tests such as are being made by INFOP at Cuyuta, on the irrigation of cotton, will be valuable guides if complete cost records are maintained. Meantime, the Na- tional Observatory should expand its recording of data on rainfall, run-off, stream flow, humidity and temperature varia- tions over areas which might some day be considered for irrigation. Finally, in analyzing the lack of development in certain coastal areas, it should not be assumed prematurely that irri- gation is the answer. While it is true that dry conditions pre- vail in parts of this region during several months of the year, the frequently swampy condition in the wet season is of at least equal significance. Elimination of the malarial mosquito which breeds in these swamps is a definite prerequisite to devel- opment. Thus, for the immediate program, it is probable that drainage is actually more important than irrigation. 74 THE ECONOMIC DEVELOPMENT OF GUATEMALA IV. A Long-Run Program The recommendations of the preceding sections are aimed at removing what the Mission considers to be the major imme- diate obstacles to Guatemala's agricultural progress. On the whole, these constitute a program of reinforcement at specific weak points of the structure in order that a large development program can proceed on a reasonably productive basis from the outset. The larger problem, however, is more fundamental. Its solution calls for a greater diffusion of knowledge throughout the rural population, a more rational utilization of the country's potential agricultural land, and the ultimate integration of a large but distinct sector of the population into the production and life of a modern economy. This is a big order and it will take a long time. Yet it will take longer if a determined effort is not made now. The Mission has therefore attempted to sketch the broad outlines of a three- point program whose objectives are : (a) rural development, (b) resettlement on the Pacific Coast, and ( c) colonization of other areas. 1. RUBAL DEVELOPMENT Recommendation No. 19: Create, by Presidential appointment, a permanent Committee on Rural Development. Approximately two thirds of Guatemala's population are Indians, most of whom live in a state of semi-isolation in which they contribute relatively little to the national economy. Basic- ally, this is the result of a historical and social situation which has prevented the Indian from developing his inherent abilities under conditions of equality with other social groups. One of Guatemala's main problems, therefore, is to find ways of enabling the majority of its rural population to incor- porate modern knowledge and techniques into its traditional way of life. Only tqe solution of this problem will make it AGRICULTURE . AND THE RO RAL ECONOMY 75 possible to narrow the present gap between living standards in the main urban centers and those in rural districts. Any realistic effort involves treating the problem as a whole and not in disconnected parts. Better methods of crop pro- duction, livestock breeding, disease control, and marketing cannot be learned by people who are illiterate and who have no clear conception of the conditions of the outside world with which they have to deal as purchasers and sellers. These things must be taught in the schools. But the schools can do little for children who are too anemic, undernourished or de- bilitated by disease to benefit from instruction, or are so badly needed in their impoverished households that they attend school only irregularly or not at all. Moreover, school instruc- tion in hygiene, manual arts and home economics will have little effect while parents remain unconvinced of their useful- ness and so long as homes remain unsanitary, crowded and exposed to the elements as most of them are now. Progress in education is dependent upon improvements in health, nutrition, housing and transport, and vice versa. Under existing circumstances, it is clear that the State must assume the major role in the advancement of these underdevel- oped segments of the economy. Yet until now most of the village schools, cultural missions, and other agencies of the national government obviously have been unable to establish a close and effective working relationship with the communities which they are supposed to serve. Progress has been hindered by the traditional aloofness of the Indians and of the rural population generally. At the same time, the programs of schools and other social agencies have not conformed to the practical needs of the rural population. Finally, at the root of the trouble, there has been a scarcity of public servants capable of effective service under the primitive and strenuous condi- tions prevailing in relatively isolated villages; repeatedly, the lure of city life has proved too strong. To develop a comprehensive and realistic program of rurai development, the Mission recommends the formation of a per- manent Committee on Rural Development with appropriate powers and finances. Such a group might be composed of one 76 . THE ECONOMIC DEVELOPMENT OF GUATEMALA or more representatives of each of the following ten organiza- tions, appointed by the President of the Republic: National Indian Institute, INFOP, Ministry of Education, Ministry of Public Health and Social Welfare, Ministry of Agriculture, Ministry of Communications and Public Works, Guatemalan Institute of Social Security, Nutrition Institute of Panama and Central America, Faculty of Economic Sciences of the University of San Carlos, The Armed Forces. Although great care should be taken to appoint to this Committee persons familiar with the conditions and needs of rural life in Guatemala and able to devote sufficient time to this task, the members of the Committee could not be expected . to serve full time. The actual program should therefore be the responsibility of a small full-time staff of, say, six persons headed by an Executive Director and including an agronomist with experience in extension wo'rk, an engineer, a rural sociolo- gist, a home economist, an economist familiar with farm man- agement and rural credit, and an expert in public health and nutrition. This staff would have its headquarters in Guate- mala City and would assume direct charge of organizing, guid- ing, and supervising the work in the communities selected for the experimental program. Recommendation· No. 20: Select three villages for testing of the rural develop- ment program. To test the development program worked out by the Com- mittee on Rural Development, three villages should be selected for initial experiments. In order to facilitate contract between the members of the Committee and field workers, villages might be chosen in areas reasonably accessible to Guatemala City but representative of each of the following regions: (1) the AGRICULTURE AND THE RURAL ECONOMY 77 western highlands, with predominantly Indian population; (2) the Pacific lowlands or piedmont region; and (3) the eastern region. Under an alternative arrangement the first two com- munities might be in the vicinity of Quezaltenango and Cho- cola, respectively, in order to take advantage of the experi- mental work of INFOP in these locations. As a first step, the Committee and the technical specialists would study the requirements of each of these communities in detail. Then, in accordance with the needs of each, a program of action would be carried out along the lines suggested below. The Village School A school would be provided, or an existing one strength- ened, to teach both the children and the adults of the village. Its curriculum would include not only reading, writing and arithmetic, but also simple methods of horticulture, carpentry and other practical arts, as well as principles of hygiene, soil conservation, modern agricultural methods, better nutri- tion, housing, community organization, cooperatives, and the like. Public meetings, with frequent use of appropriate educa- tional movies and other audio-visual aids, would be a part of the program. Thus, the school would become the center of progress for the entire community. The teacher would be considered the principal agent of communication between the villagers and the other personnel of the program, who would inevitably be outsiders. He would endeavor to generate local interest by first contacting the key people of the village, convincing them of the value of the pro- gram, and gradually establishing a close working relationship with the bulk of the population. The teacher would probably have to create suitable local teaching materials, which in most cases are not now available. Agriculture and Health Supporting the effort of the teacher, an agricultural exten- sion agent (with one or several assistants) would be appointed. His specific assignment would be to interest the village in practical means of improving agricultural and livestock output. 78 THE ECONOMIC DEVELOPMENT OF GUATEMALA The agent would maintain a Rural Center at which the villagers could observe efficient-yet simple and inexpensive- crop and livestock practices, and through them see how better results are achieved. Of at least equal importance, the agent would aid progressively minded farmers in testing new methods on their own plots. A trained nurse or social worker would be attached to the school to teach hygiene and ·home economics, to visit homes ( especially those of expectant mothers and those with babies) and to render first aid. Representatives of the various agencies cooperating on the committee would be available for consultation with teachers as well as with village citizens. Through such consultation they would explore and encourage the formation of coopera- tives and other voluntary community efforts designed to im- prove water supply, public health and sanitation, municipal government, social security, transportation and marketing. Local Resources and Traditions In the program as a whole, a special effort would have to be made to secure personnel intimately acquainted with the language and customs of the villagers. Where possible, these should be persons already known in the locality and thus better able to influence the community. Care should be taken to avoid insisting on immediate change from deeply rooted traditions, particularly those of the Indians. It would be unwise to attempt to suppress altogether the growing of corn in the highlands, to interfere openly with the established division of labor between men and women, or to disregard the still strongly surviving belief that age gives wisdom and superior knowledge. Full advantage should be taken of the voluntary community organizations which exist in many Indian municipalities. Pres- ent resources of the villagers themselves should be utilized and developed to the utmost. The use of objects brought from out- side should be limited to those absolutely essential. Materials and techniques which could become available to the local popu- lation only in the distant future should not be introduced.  AGRICULTURE AND THE RURAL ECONO M Y 79 In view of the importance of local initiative, an advisory group should be selected within each community to participate in planning. This group should be entirely nonpolitical and represent all sections and levels of the population. It would be helpful, moreover, if a proportion of the expense of th~ program (after it had come to be recognized as beneficial) could be paid by the local community through subscriptions and voluntary contributions in cash, materials, or labor. Gaining Experience Experimentation in the three trial villages should be carried on for several years before being extended to other commu- nities. The experience gathered should be analyzed carefully at every step so as to guide the modification and adjustment of the program before it is applied to more comprehensive work elsewhere. A shortage of trained, experienced and sufficiently moti- vated workers will be found to be one of the greatest difficulties in any comprehensive program of rural development. The greatest possible number of new personnel should be trained by assigning them as assistants to the rural teachers, extension agents, and other representatives engaged in field work. In the course of the experiments some residents of the rural com- munities will be found who, after appropriate training, will themselves make excellent leaders in rural community work. Later, such persons could take over important segments of the program artd release part of the original personnel for similar projects elsewhere. In fact, the first communities should serve not only as test cases but also as training grounds for future community leaders, teachers and extension workers . • Several of the activities outlined above (particularly instruc- tion in schools) are already being carried on. The Mission does not recommend their duplication by new agencies, but simply their coordination with other agencies under a more comprehensive plan through the Committee on Rural Develop- ment. Agencies now carrying on such activities should remain in direct charge of them. 80 THE ECONOMIC DEVELOPMENT OF GUATEMALA Recommendation No. 21: Abolish the present cultural missions. In the campaign described above, the important part which the school must play has been emphasized. Effectiveness of the schools will, in turn, require: (a) a curriculum in which the rural population will be given the practical knowledge which it needs, rather than one in which time .is devoted to sterile memorizing of nonessential subject matter; (b) adequate teach- ing materials drawn from the environment of the people, pre- sented in a realistic way, and sufficient equipment to enable pupils to practice techniques and manual arts which can be really learned only by practice; and (c) teachers who have a command of their subject matter, are motivated by a genuine understanding and enthusiasm for their mission, and are cap- able of establishing relations of mutual confidence with local residents. While the present cultural missions have performed useful services, their total results do not appear to have been suffi- ciently satisfactory to warrant their continuation. Among their principal shortcomings have been insufficient training of per- sonnel and inadequate acquaintance with conditions and needs of individual localities. As a consequence, their relationships with the local inhabitants, particularly the Indians, seldom have been such as to render the missions effective and to make their work of lasting benefit. Accordingly, with the start of the recommended program, the cultural missions now functioning should be discontinued and any funds currently appropriated for them should be made available to the new project. Recommendation No. 22: Expand the work of the Nucleos Escolares Campe- • sinos. The program of special schools known as Nucleos Escolares Campesinos, initiated through the Inter-American Cooperative Service of Education, holds promise even though it is still inadequate. AGRICULTURE AND THE RURAL ECONOMY 81 It must be admitted that the units now functioning are not yet supplied with all desired equipment and do not have the number of teachers and community leaders necessary to make them entirely successful. Among the teachers serving in Indian villages, few have been able to develop roots in the community or to speak the local language. The Patronatos Escolares (Parents and Teachers Organizcftions), which were expected to provide a link between school and homes, often do not operate satisfactorily or have never been formed. Nevertheless, a commendable beginning in the new pro- gram has been made by the Pre-Normal Rural School of Santa Maria Cauque and the Rural Normal School of Alameda, through the training of young Indians as teachers to. be sent back to their home communities after graduation. This effort should be continued. Particular care should be taken to pre- serve in these trainees a genuine taste for rural life, so that they will not go off to the cities at the first opportunity. It is hoped that the recent discontinuation of the Inter-American Cooperative Service of Education in Guatemala will not be permitted to ·i nterfere with this program. 2. ~ ON THE PACIFIC CoAST Recommendation No. 23: Develop methods for resettling . portions of the · highland Indian population in the Pacific coastal regions. Population Pressures Although Guatemala is by no means overpopulated as a whole, local population pressures in certain economically im- portant areas are tending increasingly to depress living stand- ards. Two fifths of the population now live in the western cen- tral highland region, which comprises only one tenth of the country's area. The majority of these people are Indians, living in the state of partial cultural and economic isolation 82 THE ECONOMIC DEVELOPMENT OF GUATEMALA already described. Topography and general ecological factors in most of this region are not conducive to high productivity; neither are the present conditions of land tenure, which in some areas have exerted undue pressure on land resources. In parts of the Departments of Guatemala, Saquatepequez, Chimaltenango, Solola, Totenicapan and San Marcos, over- intensive use of prftnitive methods of production has resulted in soil erosion and depletion. This, coupled with an increas- ing population density, makes improvement of living stand- ards impossible. Underemployment exists because of the sea- sonal nature of subsistence agriculture or the relatively un- productive cultivation of marginal lands. More Productive EHort One method of afieviating this problem would be to pro- mote a somewhat better division of labor. Under this approach a larger proportion of the present highland population would be brought to depend less on the growing of corn, which can be better grown elsewhere. More emphasis would be placed upon livestock and dairy products, fruit production (apples, pears, plums, etc.), truck gardening and indigenous crafts. Guatemalan handicraft products such as textiles, woolen rugs and silverwork have a long and distinguished tradition and should have promising opportunities for export, especially to the United States. 16 At a later stage, with the ample labor supply and cheap hydroelectric power which might be gen- erated, it is possible to visualize small manufacturing plants located in this area. In combination with part-time agriculture or horticulture, these would offer at least a partial solution to the problem of occupying profitably a growing highland population. Colonization Of still greater ultimate value-although more difficult to achieve-would be the permanent resettlement of portions of '" The recently established school of wool carpet-making in Quezaltcnango appears to the Mission to be an excellent step in this direction. To assure adequate markets and profitable prices for original producers, and to safeguard the valuable original patterns, the cooperation of the National Indian Institute and of experienced experts in cooperatives and export trades should be obtained. Moreover, the restoration and improvement of ancient Indian techniques should be attempted, as has been done so successful17 in recent years in Peru by Mr. Truman Bailey. AGRICULTURE AND THE RURAL ECONOMY 83 the highlands population in other areas of the country. For such resettlement the country has ample opportunities. The north coast, the Zona Reyna and perhaps the Peten can in time absorb a substantial increase in population. But the Mission feels that the Pacihc coast and the lower piedmont offer the most satisfactory prospects for this purpose. The Pacific coast region, with its excellent soils and topog- raphy and its favorable climate, has approximately the same land area as the western central region yet only one third of its population. If the threat of malaria were removed as has been done elsewhere, numbers of highland Indians might be settled permanently in these lower regions. Such a step would also reduce the number of seasonal workers who now mttst move each year from the highlands down to the coffee fincas to supplement their insuti.cient earnings with some harvest money. The present seasonal migration wastes much time, interrupts the school attendance of children and contribute,s to the spread of diseases which returning workers carry back to the highlands. Any resettlement project would require a substantial capi- tal investment to acquire land, clear it and provide essential public utilities. It could not be done hurriedly, or the socio- logical problems would doom it to almost certain failure. Therefore, the Mission believes that resettlement should form part of a long-run program, coordinated closely with the Rural Development Program. Planning and Execution Land tenure in the Pacific coast area should be studied carefully in advance to assure that suitable land will be avail- able for any resettlement projects which might be contem- plated. To permit accurate determination of the desirable size and limits of any proposed resettlement effort, land-use capabilities and distribution of population should be examined, using the 1950 population and agricultural census, aerial pho- tographs, soil surveys and other basic infd\"mation. When properly analyzed by an appropriate team of technicians, these data should indicate highland areas which need relief from 84 THE ECONOMIC DEVELOPMENT OF GUATEMALA population pressure, as well as the new areas on which addi- tional population could be settled most profitably. From the administrative standpoint, settlements should be in the form of small villages rather than separate farmsteads. This will permit them to fall nattirally into the framework of the Rural Development Program. It will also facilitate health control, for special safeguards must be taken against the lowland diseases of which the Inclians are justly afraid. Experienced advisors should be called upon to enable the Indians to develop settlements where they can continue their traditional cultural and social pattern of life to the fullest extent compatible with the new methods introduced. Trans- fers should be voluntary. In this way it may be possible to avoid some of the problems of socj;il maladjustmen't which have arisen in the past. 3. COLONIZATION OF 0rm:R AllAs Recommendation No. 24: Confine government colonization work to the Pacific coast and to technical support of existing projects. It appears doubtful to the Mission that the Government should, with present funds, attempt any major colonization or regional development projects outside the Pacific coast area, which appears to be the most promising from the point of view of agricultural production. An exception is the colony already being developed in Poptun, which apparently still requires considerable financial and administrative aid. Even on the Pacific coast experience with the agricultural commun- ities at La Blanca and Montufar indicates that any further immediate projects of this nature might only add to expendi- tures without commensurate returns. Essential services and agricultural. research programs should, however, 'be provided for the population already estab- lished in underdeveloped areas such as the lower Motagua Valley, the Lake Izabal area and the Peten. AGRICULTURE AND THE RURAL ECONOMY 85 Poptun In the Poptun Colonization Project the Mission observed gratifying progress in housing, road construction and experi- mentation with different crops. We believe, however, that a review of the Poptun experience by the proposed Advisory Committee on Rural Development would suggest ways in which government expenditures migh~ be reduced. The Mission believes that more progress can be made by steps designed to attract voluntary permanent settlers instead of attempting to populate the area by administrative measures. Furthermore, funds. should go into aids to production, such as soil surveys, crop trials, farm roads and sanitation, instead of urban development at this time. The 03,000 spent on each of the present Poptun houses would probably have been enough to set a farmer up in business. Except for experimentation and seed production, future development of the area should be based on privately owned farm holdings large enough to supply an adequate living to a family. Otherwise it will be impossible to achieve standards of husbandry necessary to make the area useful in the national economy. Present plot tests of the Poptun project should be . ex- panded. Promising crop material should be placed on farms for testing under normal field conditions. A greater number of varieties of cane, corn, beans, cacao, rice, vegetables, pasture grasses, legumes and livestock now available within the c-ountry should be put under test. Provision should be made for increasing the seed supply of the more successful crops. Possibilities of chilte, too, should be th.o roughly tested. The pine forests around Poptun should be put under a manage- ment plan for lumber production. In the Peten in general, the Mission feels that develop- ment should center about forestry as the basic initial industry. In view of the capital, technical experience and marketing connections needed for the development of this industry, pri- vate logging companies should be encouraged to establish operations in the region. Such industries could provide con- 86 THE ECONOMIC DEVELOPMENT OF GUATEMALA siderable employment, finance the construction of a local road network, and assist in opening the area to agricultural develop- ment. Private companies should, however, be required to conform to a long-term plan for the use and development of the area's resources. There should be safeguards against overcutting, with obligatory replaniing. In regions opened for lumbering, basic food crops should be assured so as to avoid high living costs and local dependence upon a single and possibly unstable source of income. Health, educational and other essential services should be provided eit.her by government agencies, or by the companies themselves, or under a suitable formula for cooperation between them. A nucleus of trained technical men, including a forester, an engineer and a soil specialist, should provide government supervision and research activities in the area. 17 This group should make additional studies and plans for the continual improvement of stands and for the assurance of their per- petuity on sections assigned permanently to forestry. Surveys should follow the development of the roads, so that lands best suited for permanent cultivation may be determined. Atlantic Coast Areas The lower Motagua and Lake Izabal areas are already reasonably accessible by railroad, the lake, and the Rio Dulce waterway. These areas contain a fair-sized population, said to be composed mainly of squatters. While doubtless the in- habitants possess certain land rights which ought to be respected, it is probable that a sounder system of land tenure and more rational land use would yield a larger volume of production. As in the Pacific coast area, malaria control and health services would have to be made more effective. A ready local market is now available for meat, plantains, corn and rice from the lower Motagua Valley. Greater beef production, based on the breeds of cattle now in use, should be assisted. Small drying and storage facilities for rice, corn 11 Holdridge and others, op. cil.  AGRICULTURE AND THE RURAL ECONOMY 87 and beans should be considered at a future date, when pro- duction becomes large enough to make these installations self-liquidating. Abandoned banana lands near Bananera ( said to be up- wards of 30,000 acres) have been partially drained and equipped with tramways. Attention should be given to the possibilities of stimulating private use of these lands for large- scale cultivation of abaca, cacao and African oil palms. The cooperation of the United Fruit Company might be enlisted in this, as has been done in the past two years in Costa Rica, Honduras and Panama. The Company and its subsidiaries ha:ve had ample experience with these plants and could be helpful in assuring that Guatemala is not left behind the other countries in supplying the export market for such products. Although agriculture is more limited around Lake lzabal, it is believed that an agronomist and an animal husbandman in full-time residence could help farmers to improve the efficiency of their operations. This could be done within the structure of the Rural Development Program and could in- clude trials of crops less known in the region such as cacao, African oil palm, bamboo, chilte and corozo palm. 18 . Immigration Both on the Atlantic and the Pacific coasts, it is possible that carefully selected immigrants from abroad could make important contributions to the development of thinly popu- lated areas. Guatemala is still without the engineers, me- chanics, artisans and agricultural technicians needed for ex- pansion· of these regions. Such types of personnel in the num- bers desired can only be obtained quickly through immigra- tion. From the point of view of the country's long-term inter- est, it would be preferable to induce such persons to settle in Guatemala permanently and to raise their families there rather than to employ them for short terms at relatively high salaries. 11 Although until now corozo oil has usually been expensive to produce, the cost of cracking the nuts has been a large factor. Sound technical work can probably solve this p~blem, if it has not been solved already. It is also clear that processing closer to the source of nuts will reduce costs. 88 THE ECONOMIC DEVELOPMENT OF GUATEMALA In addition to the specialized categories of immigrants ~uggested above which involve relatively limited numbers of persons, serious consideration should also be given to the pre- paration of a plan for mixed settlements of Ladino-Guatemalan and foreign farmers. Such persons could be extremely useful in helping to develop among the Guatemalan rural population more productive techniques and healthier habits of housing, home economics, hygiene and community organization. Recognizing the past problems in selective immigration attempts, the Mission believes nevertheless that the procedure holds advantages for the country. V. Priorities and Expenditures . Taken together, the various recommendations in this chap- ter constitute what the Mission believes to be an integrated program of agricultural development within the reach of Guate- mala's present and prospective resources. Individually, the recommendations are of varying degrees of urgency. Many are so related to others that they cannot be considered by themselves; for others, some separation is pos- · sible. Should it become necessary to choose between them because of limited resources, a certain order of priority can be established. In this the Mission offers some suggestions. First priority should be assigned to increased production of basic foods, the setting up of the Rural Development Program, establishment of an agricultural research and extension service, reorganization of the Pincas Nacionales, and all measures de- signed to increase coffee production. The first three are basic to any plan for agricultural development, while the others rep- resent sources of increased revenue to help pay for the program. Included in the first group are: the INFOP corn and cotton mechanization project now in progress at Cuyuta, and its special training of operators and mechanics; the projected storage facilities for crops; the several projects for the pro- duction of supplies of improved seed; and the provision of fertilizers, fungicides and insecticides. • AGRICULTURE AND THE RURAL ECONOMY 89 Another recommendation in this category is the establish- ment of the Section on Agricultural Statistics. The work of this office bears. upon all parts of the entire program. Second priority should be given to such projects ( other than those needed for the above-mentioned purposes) as promise early economic returns. Preference should be given to those already under way or well advanced in planning. Develop- ment of cotton, abaca, vegetable oils and cacao, experimental breeding of livestock, dairy products, the Poptun Colonization Project within the limits suggested would, among others, fall in this second group. Third priority should encompass forestry development, fur- ther expansion of small agricultural credit, special facilities for processing agricultural products, irrigation experiments, further land-use surveys and rese~tlement. Of these, forestry might lead the others if the necessary competent personnel can be obtained. Most .of the projects not specifically mentioned above will arrange themselves in logical order in accordance with actual need. Careful scrutiny will show that some may have to be deferred. For example, the larger irrigation projects for the San Jeronimo Valley and La Fragua should be postponed until further information is available. Table .XVI gives a suggested division of additional expen- ditures. These expenditures are, of course, over and above the present or normal expenditures on agriculture and agri- cultural devefopment. It has also been assumed that the Pincas N acionales should be able to provide for their own mod- ernization and equipment.rn These, of course, are merely in- dicative and cover only t he initial period. Also, they refer only to those projects for which specific recommendations have been made in this report. 10 Sec pages 273-4. 90 THE ECONOMIC DEVELOPMENT OF GUATEMALA TABLE XYI PROPOSED ADDITIONAL EXPENDITURES ON AGRICULTURE FIRST YEAR Capital Operating Recommendations expenditures expenditures 1. Personnel, buildings, equipment, breeding stock, etc., for research and extension .. ......................... . 0 50,000 0160,000 2. Farm mechanization : a. Second mechanization center ......... .. ............. .. 100,000 40,000 b. Trained facilities for machinery operators .. .. 30,000 3. Seeds, fertilizers, fungicides, etc., for use on S~ate-.farms, experiment stations, and for dis- tnbut10n ......................................... ......................... .. 150,000 4. Three local storage centers ............. .... ................. .. 60,000 15,000 5. Technical studies on processing of crops ........ .. 10,000 6. Small agricultural credit .... ........ .. .......... .. .. .......... .. 150,000 7. Irrigation ( small projects) .... .. .. .. ........................ .. 100,000 10,000 8. Agr]c~ltural statistics ................ .......................... .. 20,000 9. Trammg programs .. .... .. .... ................................ .. .. .. 40,000 10. Participation in Faculty ....... ............... (Library) 20,000 10,000 of Agriculture ................ .............. (Laboratories) 40,000 11. Technical services in the Peten .... 15,000 15,000 12. Forestry (including reforestation) .. .. .................. 60,000 20,000 13. Advisory Committee on Rural Development.. .. 20,000 40,000 14. Resettlement program (preparation) ...... .. ........ .. 10,000 15,000 625,000 575,000 SECOND YEAR Capital Operating Recommendations expenditures expenditures 1. Personnel, buildings, equipment and breeding stock for research and extension .. .. .. .. .. ............. . 0 45,000 0200,000 2. Farm mechanization : a. Third mechanization center ........................... . 100,000 80,000 b. Training facilities for machinery operators 3. Seeds, fertilizers, fungicides, etc., for use on • 60,000 St.ate .farms, experiment stations, and for dis- tnbuhon .......... .. ................................... ........... .. .. ... .. . 200,000 4. Three new local storage centers ...................... .. 60,DOO 30,000 5. Processing and market preparation of crops .. .. 10,000 6. Small agricultural credit ...................................... .. 150,000 7. Irrigation (small projects) .. ................................. . 100,000 20,000 8. Agr!c~ltural statistics .................................... .. .. .. .. 10,000 50,000 9. Trammg programs ................. ............... ........ ...... .. 60,000 10. Participation in Faculty of Agriculture ..... .. .. .. 10,000 11. Technical services in the Peten .... .. ............. .. 15,000 15,000 12. Forestry (including reforestation) .................. .. .. 20,000 30,000 13. Advisory Committee on Rural Development.... 20,000 40,000 14. Resettlement program (preparation) ................ .. 10,000 15,000 15. Additional unallocated expenditures on items 1 to 14.... ............................ ......................................... . 75,000 75,000 Total additional expenditures ............... . 605,000 895,000 NOTE: As the program develops, expenditures on individual items will naturally vary. If further mechanization centers are not installed, the total of these additional expenditures will be !2)100,000 less for the third and subsequent years.  CHAPTER III Industry I.' Guatemalan Industry Today In its present state of development, Guatemalan manu- facturing activity occupies 'a comparatively minor place in the national economy. This fact in itself cannot be taken as a measure of the over- all development of the Republic. It must be borne in mind that the best known natural resources of the country are agri- cultural and that it is toward better utilization of these that the most extensive development must initially be directed. In regard to industry, a significant measure of progress is the degree to which the products of the soil are processed and transformed locally into their ultimate marketable form whether designed for sale at home or abroad. There are, certainly, minerals and other available resources of a nonagricultural nature. There are also underutilized hu- man resources. All of these have already contributed to some of today's industries and will justify a reasonable future ex- pansion in nonagricultural processing industries. At the present time, while Guatemala possesses hydroelec- tric potential, she has neither coal nor petroleum in available form. Unless this situation changes, it is unlikely that many heavy industries will be established; for only a few of the heavy industries can use electric power as a satisfactory sub- stitute for carbonaceous fuel. This does not mean that signi- ficant industrial expansion cannot take place in Guatemala. Development, based largely on agricultural processing can be substantial, and produce a quite substantial increase in na- tional income. A recent summary (1948) shows about 800 so-called indus- trial establishments 1 with a total of 23,000 employees. Their output, combined with that of an unascertained number of 1 Defined here as processing enterprises employing five or more persons, exclusive of mining and the generation of power. 91 92 THE ECONOMIC DEVELOPMENT OF GUATEMALA Indian handicraft workers, totalled ~48.6 million,2 or somewhat over 14 percent of the gross national product. Leading industties are shown in Table XVII. Most of them produce consumer goods typical of industrial develop- ment in its early stages, such as alcoholic beverages, soft drinks, textiles, basic foods, shoes, soap, candles, cigars, cig- arettes and furniture. Production is chiefly for the domestic market. The enterprises tend t~ be small and often employ very simple processes. A very large segment of production is that of the Indian handicrafts which includes especially the colorfully patterned cotton and wool fabrics, blankets, table- cloths and articles of apparel for which the country is famous. Table XVII includes some, but not all, of the processing of Guatemala's main agricultural products. In this it is of course difficult to draw a line between what is truly manu- facturing and what should be classed as a part of actual farm operations. The hulling and washing of coffee has been in- cluded in "agricultural" output (Chapter II), although it may be considered an industry also. Sugar refining, with its large plant investment and highly specialized engineering tech- niques, must be classed _ a s industrial. It is, in fact, in these border-line industries that much of Guatemala's industrial future lies. To a corresponding extent, industrial growth will depend upon increased agricultural production. As may be seen from the production figures given in Table XVIII; practically all of the larger industries have been expanding during the last decade. 8 Yet the rate of growth of manufacturing production has tended to lag behind the rise in per capita income. 4 ' Thus industry has failed to grow as much as it should normally, even without deliberate efforts for development. A relative stagnation exists. It is the purpose of this chapter to examine some of the factors-whether physical, technolog- • A revised calculation of net industrial product ("value added by manufacture") made by U. S. Federal Reserve Board experts indicates a figure of 11)46.3 million. This study apparently includes categories of activity not shown in Table XVII, and some differences in individual totals. • The recent decrease in textiles occurred after an earlier expansion which waa not recorded statistically. • Adler, Schlesinger and Olson, op. cit. INDUSTRY 93 ical, economic or political--which may be at fault. This, in most cases, will be done only briefly, as many of these factors are discussed more fully in Chapter VIII or in other appro- priate parts of the report.S TABLE XVII VALUES OF MANUFACTURES AND RAW MATERIALS CoNSUMED, 1948 (in thousands ) Domestic Imported Production raw raw Product value materials materials FOOD INDUSTRIES Beer and liquors .. ........... .. ................ . 0 5,726 0 1,079 01,460 Carbonated water .. .. ... ................. .... .. 497 131 168 Bakery goods ..................................... . 1,309 491 664 Refined sugar .. ....... .. ................... ....... . 2,591 974 44 Candy ................ ........ ... ........................ . 615 212 82 Vegetable oils ............ .... .. ... .......... ....... 290 36 1 Miscellaneous food products ........... . 2,501 2,197 235 TEXTILE, CLOTHING, SHOES AND INDIAN HANDICRAFT Textile fabrics ................ .. .. ............... . 2,331 1,590 1,696 Textile yarn ....................................... . 566 26 424 Oothing .. ........................ .. ..... .. ............. 838 83 611 Indian-made clothing ..................... ... 4,551 n.a. n.a. Indian handicrafts ................ ........ .. ... . 6,187 n.a. n.a. Tanned leather .... .... ........................... . 1,073 360 70 Shoes ... .................. .. ................. ........... . 633 233 299 Miscellaneous leather products .. ..... . 24 8 3 Straw hats ................. .. ............ ........... 340 61 84 TOBACCO PRODUCTS Cigarettes .... .. ...................... ............... . 3,462 2,294 840 Cigars .................................................. 1,041' 610 4 BUILDI N G M ATERIAL S Cement and products .. ............... ........ . 1,006 339 373 Ceramic products ................................ 166 2 99 W OOD I N DU STRIES Lumber .. .............................................. 792 338 14 Wood furniture ................................. . 190 94 89 O THERS ,Soap and candles ........................... .. 8,546' 853 298 Cordage .... ............... ....... .................... . 17 IO 1 Printing ............ ........ ... .. ............... . 475 36 397 Others ....... ............................ ... ... ..... . 2,859 624 995 Totals ............................... . --- 48,626 12,681 8,951 1 Quest ionable. SOU R CE S : Ministerio de Economla y T rabajo and others. • l!'or an excellent and detailed analysis of some of these aspects see Juan U . Maegli, Guatemala: Problems and Possibilities of I ndustrialieation. In citing this work, the Mission does not, of course, necessarily endorse all of the author's statements. 94 THE ECONOMIC DEVELOPMENT OF GUATEMALA TABLE XVIII COMPARATIVE PRODUCTION OF SELECTED INDUSTIUES IN RECENT YEARS Wheat Prepared flour Aguardiente Liquors Cement (thousand Cigarettes (thousand (thousand index Year quintals) (mill ions) liters) liters) 1937=100 1937................ 112 n.a. 1 n.a. n.a. 100 1938................ 110 607 2,856 302 90.7 1939................ 117 595 2,576 881 89.6 1940............ .... 123 624 2,029 1,316 117.9 1941 ................ 119 583 1,758 1,554 173.8 1942................ 120 656 1,983 1,908 177.3 1943 ................ 132 804 2,648 2,430 188.8 1944.. .............. 146 975 2,635 2,765 206.5 1945 ................ 157 906 2,714 3,231 248.1 1946 ... ............. 204 1,132 2,759 3,398 253.3 1947.. .............. 163 1,249 3,005 3,807 257.3 1948 .. .......... .... 151 1,387 3,103 4,030 288.9 1949................ 153 1,456 3,080 4,195 328.1 Refined Beer sugar Matches Textiles (thousand (thousand index index liters) quintals) (1945 = 100) (1946=100) 1943 ............ ...... .......... 4,358 n.a. n.a. n.a. 1944............................ 5,897 n.a. n.a. n.a. 1945 ........ ................ .... 8,144 n.a. 100.0 n.a. 1946....... .. ................... 8,148 521 96.3 100.0 1947............................ 10,330 583 36.1 103.9 1948 .. .......................... 10,221 574 99.6 98.8 1949............................ 9,739 680 230.7 84.3 1 Not available. SouacE: Ministerio de Economla y Trabajo. II. Factors Influencing Industrial Development I. RAW MATERIALS Preoccupation with the undeniable social effects of indus- try may occasionally tend to obscure its essential purpose: the transformation of raw materials into more useful forms as economically as possible so that the final products can be widely available. A prerequisite for industrial develop- ment is an adequate supply of raw materials at reasonable cost. • INDUSTRY 95 It is immediately apparent that the retarded state of Guatemala's agriculture is a deterrent to her industrial prog- ress. The factor is doubly significant, since agriculture is the country's biggest potential source both of industrial raw materials and of consumer income. Hence, uneconomic pro- duction, high prices and irregular supplies of agricultural products attack industry at both ends. Of the specific industries listed in Table XVII, it will be seen that over 85 percent of the total production is based directly upon agriculture. It is also clear, however, that domestic agriculture contributes only slightly over half the total materials consumed by all Guatemalan industry. Dis- proportionate reliance upon imported materials on which shipping and other added charges must be paid, plus shortages and high prices for some domestic supplies, results in un- necessarily high costs for industrial raw materials. Abnormal costs extend also to other supplies. Building materials, fuel and power are expensive. Construction of in- dustrial buildings is still more costly because of inefficient management of construction labor, with attendant loss of time. Similar construction problems affect the ultimate cost of power. 2. LABOR Cost, availability and adaptability of labor all influence industrial production to a marked degree. Although labor is available, the productivity is not high. The Guatemalan worker is greatly handicapped. His gen- eral level of health is poor. Malaria and intestinal disorders in some regions reduce his capacity and ambition. His nutri- tion often is not such as to permit him to do intensive work for long hours. Although inherently able to learn special skills, the local worker frequently lacks even a good elementary school educa- tion. Without this background his vocational training is made more difficult. Progress is therefore slow, not only in the creation of the necessary class of skilled workers but also in the training of good foremen and supervisors who should be drawn from labor's ranks.  • 96 THE ECONOMIC DEVELOPMENT OF GUATEMALA Organized resistance to modernization and mechanization of factories, as well as legal provisions which make it ex- tremely difficult to release unsatisfactory workers, have raised manufacturing costs and impeded development. These things, too, are probably matters of education and will undoubtedly improve when the worker is afforded a better opportunity to understand the economic implications of his role in pro- duction. 3. TECHNOLOGY Present working methods and types of industrial equip- ment in the country vary from industry to industry and even from plant to plant. A good many establishments are not yet beyond the handicraft stage. Others, such as the newest cotton textile mills and a cement plant, compare favorably with industrial installations of more advanced coun- tries. On the whole, however, there is room for a great deal of improvement in efficiency through modernization of methods and machinery. Few factories make any effort at technical control of the quality and uniformity of their products. The numerous small enterprises are unable to provide, individually, the technical service or investment needed for such control and few of their proprietors possess the specialized training to handle it themselves. Even many of the larger operators, who can afford it, do not appreciate the importance of techni- cal control in reduction of their over-all costs and expansion of their markets. Were industry to call for it, on the other hand, the nation now has altogether too few trained technicians to render the necessary aid. Specialized educational facilities are inadequate, and therefore a domestic supply of such personnel will not be forthcoming in the near future. It is evident that at the highest levels of technology Guatemala must rely heavily upon foreign technical skill and training centers for some time to come. 4. MANAGEMENT Guatemalan management has not yet been won over to the economy of high wages, a large volume of production and  " .. INDUSTRY 97 low prices. Mark-ups and profit margins are usually high. It is argued that since the market is so small the manufacturer must make a large profit on each sale. Local manufacturers are not easily attracted to the idea that lower prices might broaden their market. It is true that within Guatemala this can happen only slowly in some cases, until income levels rise. · However, even in cases where it appears practicable, there has been reluctance to try it. Broader adoption of some tested m'.anagement principles, such as merit promotion and incentive wage scale, would do much to improve the quality and quantity and to reduce costs of production. The more progressive Guatemalan entrepren- eurs have benefited greatly from their contacts and experience in other countries in this respect. A greater interchange of personnel and publications, as well as the development of for- eign investment (possibly in the form of joint Guatemalan- foreign enterprises) would help to modify some set psycho- logical attitudes. Obviously, such exchange would also be very valuable in the technical field, particularly in those industries which require a high level of technical skill. 5. CAPITAL AND CREDIT Guatemala does not possess more than the embryo of an ordinary capital market (see Chapter IX). Until the creation of INFOP, which offers medium and long-term credit facili- ties, industry has had to rely almost exclusively on its own funds for expansion. In new and locally unexplored industrial fields, mobiliza- tion of sufficient capital funds has been made more diffictflt by the generally conservative attitude of Guatemalan capital- ists. It must be recognized, however, that new ventures require careful scrutiny for which the means are not always available. Meanwhile the opportunities for profit in the traditional fields are large enough to compete strongly for investment funds. Private capital shows a certain reluctance to enter new productive fields. Desire for abnormally high profits as well as political instability and implied threats to property rights have tended to limit opportunity. According to some observers,  98 THE ECONOMIC DEVELOPMENT OF GUATEMALA investors often want to amortize plants in as little as three years to assure recovery of their capital before some unex- pected blow falls. Capital has sought refuge in real estate; and because of alleged fear of expropriation, at least some of it has gone into real estate outside of Guatemala. Finally, charges have been made by many Guatemalan employers, to the effect that industry in recent years has not received the impartial support of Government. It is alleged that labor-management disputes have almost invariably been settled with bias in favor of the worker and that this has discouraged prospective investors. 6. TRANSPORTATION Defects in the national transportation system (see Chapter V) affect industrial development adversely in numerous ways. They contribute at the outset to the high cost of raw materials and supplies. Similarly, they increase the difficulty and cost of distribution of finished products. Lack of highways in some areas effectively shuts off potential markets. Internal transport problems-in addition to the distance from main foreign centers of supply-handicap manufacturers through the large inventories which they must maintain to avoid uncertainties. With capital and credit limited and with funds tied up in inventories, there is less capital available for productive purposes. 7. GoVEBNMENT CoNTBOLS6 Protection afforded by import prohibitions, restrictions and tariffs and the lack of strong domestic competition have re- duced the incentives for improving efficiency. Replacement of obsolete equipment by private capital will make little prog- ress as long as the Guatemalan market is surrounded with these high barriers. Under Guatemalan conditions, protection of an "infant industry" may at times have appeared justified. But experience has shown that some industries which have been developed can • See aho Chapter II and Recommendations Noa. 63 and 64 in Chapter VIII. ,, INDUSTRY 99 survive only on the basis of indefinitely continued protection. Such a policy leads to a waste of national resources at the expense of the general welfare and hampers healthy industrial development. Any step to preserve an outmoded industry or to create an uneconomic one is actually a step to prevent the standard of living from being raised. In some industrial lines, protection from competitive im- ports has merely caused a rise in domestic price rather than an expansion of the internal market. For local producers do not always take full advantage of their protection to increase their sales, but, instead, push their own price up to the level of the duty-paid, imported article. The effect of this is to reduce purchasing power and so to limit the internal market still further. Both import prohibitions and excessively high tariffs make smuggling more profitable and tend to increase its volume. It is reported that substantial amounts of contraband have been entering the country recently. In the present undeveloped state of border regions, this is extremely difficult to control. Manufacturers complain that both their production and movement of goods suffer from excessive controls and other forms of bureaucratic red tape. Some of these controls may be justified for special reasons but in such cases they could be handled with more dispatch to avoid costly delays and harm to industries. Price controls, though designed to protect low-income groups, must also be regarded as dangerous to national pro- duction. It is difficult to induce capital to expand its activities into lines thus made unprofitable. Experiences of this kind are too well known to require illustration here. 8. MAma:Ts Neither shortage of capital nor the other factors mentioned above account entirely for the limited expansion of industry. Lack of demand for most products at their present selling prices is probably the most fundamental obstacle of all. Guatemala's domestic market is small primarily ·because of the extremely low purchasing power of her people. It is 100 THE ECONOMIC DEVELOPMENT OF GUATEMALA clear that this condition can be altered only gradually. Im- provement can come through increased agricultural and industrial productivity and improved transportation-all mea- sures to lower domestic raw material costs-and elimination of excessive profit margins. As these changes take place, with their interrelated and cumulative effects, real wages will rise and local markets will expand in depth. In a small market, specialization and division of labor can- not be pushed very far and production in many fields cannot even be attempted. But geographical expansion of markets is possible. Some form of coordination of industrial development among Central American countries could help significantly to create markets big enough to support optimum production. This should certainly be attempted with new industries, even though it may be more difficult to realize for existing oi'i.es. III. Potentialities of Selected Industries In such a diversified field as industry, only very brief inspection and comment on any single activity is feasible within the scope of a Mission of this kind. It is felt, however, that specific suggestions can be of more immediate application and benefit than mere generalities. Accordingly, in the following pages the Mission has at- tempted to indicate the status and possibilities for development of a number of selected industries, including technical sug- gestions wherever possible . . 1. BEVERAGES Although the making of alcoholic drinks is one of the largest items in Guatemalan industrial production, its present comparative importance stems partly from underdevelopment in other lines. Beer and soft drinlis. Three domestic breweries supply over 90 percent of the beer consumed in the country. It is under- stood that a new plant is soon to be added. BeeT production, which had risen to a peak in 1948, appeared to be tapering off in 1949. ·w ith the contemP.lated expansion, INDUSTRY 101 capacity seems adequate to meet demand. Total beer consump- tion in Guatemala is low in comparison with many other countries. There is room for considerable increase in produc- tion following other economic development, which may well result in larger consumer demand. The development of the soft drink, and particularly of the mineral water industry, is an interesting possibility in Guate- mala where establishments preparing carbonated water are small and often do not meet the highest sanitary standards. The industry could be significantly helped by growth of tourist traffic. Expansion of the soft drink markets, however, depends primarily upon increased purchasing power among the people. Aguardiente and liquors. Guatemala's most popular "hard" alcoholic beverage, aguardiente, is a crude distilled liquor made from the fermentation of unrefined sugar. Factories are located in virtually every departmental capital and in Guate- mala City are centralized in a fiscal zone for easier tax collection. Aguardiente is made under varying sanitary conditions. Bottles are collected by Indians and re-used, often after per- functory washing. In the larger plants conditions are some- what better, but not uniformly so. This situation is equally true of much of the preparation of flavored liquors. Apart from the present aguardiente, rum, a healthier beverage and one generally regarded as pleasanter, could be made from molasses. Irrational selection of raw material (discussed under Sugar) appears to be the chief economic problem in connection with these products. 2. SUGAR Two methods of sugar processing are employed in Guate- mala. One is the. standard factory operation of heavy machine grinding and refining; the other is the old "cottage" method ·of making pane/a, a crude brown sugar containing all of the molasses. 102 THE ECONOMIC DEVELOPMENT OF GUATEMALA The present sugar shortage would appear to be largely attributable to inefficient recovery and to legislation which causes wasteful utilization of the crop. Refined sugar. Most Guatemalan sugar mills are of medium to small size. Their combined capacity, however, exceeds the actual cane output. No additional mills are needed at present. Mill equipment, with some exceptions, is old. Efficiencies of extraction are low on the average (nine percent yield), caus- ing considerable waste of sugar in the poorest ones; not all of them burn their bagasse; much unnecessary supplementary fuel is consumed and some even burn wood to the detriment of the forests. Modernization of some of these mills would be of economic benefit both to their owners and to the nation. Yet the most serious waste is not the fault of the mills. Although in El Salvador, Cuba and other sugar-producing countries aguardiente and rum are made from molasses, Guate- malan law prohibits it. Aguardiente is therefore made from panela, while the molasses by-product from the mills must be discarded. The Mission has no explanation for this unless it is intended to protect the market for the even less efficient panela producers. In July 1950, stocks of panela were nearly exhausted and the Government decreed that liquor distillers could use 50 percent molasses and 50 percent panela for four months; but thereafter they were required to revert to panela entirely. An estimated three million gallons of molasses are wasted annually because of this prohibition. This amount is probably more than enough to make all of Guatemala's aguardiente and liquor and leave an excess for cattle feed. The practice would free the entire production of panela £or food, to make up the domestic sugar shortage, even without improving mill efficien- cies. Manufacture of candy, soft drinks and canned fruits would be facilitated. 7 Panela. In typical panela production, the cane is ground in a small wooden or metal mill, sometimes powered by oxen or a water wheel. Only a fraction of the syrup is obtained. • These suggestions are not new. See M. K. Ovalle, Industrial Report on the Republic of Guatemala, (Washington, D. C., 1946). INDUSTRY 103 This is filtered and limed, then evaporated in simple kettles. When ready to crystallize, the mass is poured into block molds. Retention of panela production is an economic luxury which can be justified if the people prefer the flavor; yet it is expen- sive in time, labor and fuel, and wasteful of national resources. It is possible that improved methods could produce it with less loss, but this would probably require putting it on a factory basis. 3. FLOUR Wheat /four. Guatemalan wheat satisfies less than half the country's wheat flour requirements and the proportion of do- mestic flour consumed has been dropping. The limiting factor has been local wheat production, which is less than the existing milling capacity. Although several new mills have been erected within recent years, these have had to augment their raw material supplies with imported Canadian or United States wheat. Domestic wheat is, in fact, of soft quality and high priced. Millers· normally prefer the foreign hard wheat. Under present conditions domestic flour actually is more expensive than im- ported flour; competition is possible only through special re- strictions, such as the requirement that an importer must pur- chase an equal amount of domestic product. Since very little of Guatemala is natural wheat country, it seems logical to encourage importation of good wheat at rea- sonable prices to be mixed wit_ h domestic soft wheat. Wheat imports can be transported in bulk, while flour im- ports must be sacked and handled much more carefully. Expansion of domestic milling through greater use of imported wheat would mean better use of milling facilities, larger sup- plies of by-product livestock feeds, and a greater opportunity for local manufacture of flour sacks. Corm flour. Industrial preparation of tortilla flour, such as has been developed under the auspices of the Banco de Mexico, may prove feasible in the larger cities. Advantages of this type of flour include efficient milling, sanitation, easier distri- 104 THE ECONOMIC DEVELOPMENT OF GUATEMALA bution and prevention of waste through unused tortilla masa. Blending of extenders and fortification with vitamins are also possible if desired. 4. FISH As an article of the Guatemalan diet, fish has been almost ignored down to the present. Per capita consumption ( esti- mated at 0.1 Kg. per year) is the lowest recorded in Latin America. 8 In spite of this, porduction is even smaller; 378 metric tons of fish products-mostly canned-were imported in 1947. Guatemala has probably made less use of her avail- able fisheries than has any other Central American country. A thorough review of present fishery resources and possi- bilities was made in 1946-47 by a Mission of the Fish and Wildlife Service of the United States, in cooperation with representatives of the Guatemalan Government. 9 The findings and recommendations of this report should be fully studied and utilized. Promising possibilities exist for both fresh water and salt water fisheries, not to mention die opportuni- ties for sport fishing as a tourist attraction. Fish would make a desirable addition to the protein fraction of the local diet. Moreover, if canneries were established, the wastes could furnish fish-meal as an important contribution to balanced livestock feeds. Domestic consumption of fresh fish would probably increase spontaneously if greater supplies brought lowered retail prices. The principal problems at the moment are lack of experi- ence in the field, shortage of equipment, absence of sheltered ports, and inadequate refrigerated transport and storage. 0 Nevertheless, it would seem desirable to attempt to intere st experienced private capital in exploring the opportunities for large-scale off-shore fisheries both for the domestic market 8 It compares with 1.3 kg. in Costa Rica (1947), 1.7 kg. in Mexico (1948/ 49) 2.1 kg. in Panama (1948/ 49), five kg. in the United States, 14.9 kg. in Venezuela (1948)49) and 40 kg. in Jamaica. See Agricultural Req,.isites in Lalin America, Report of the Joint ECLA/ FAO Working Party, (Lake Success, N. Y. ; United Nations 1950) p. 103. • George B. Saunders, Ancil D. Holloway, and Charles 0. Hadley, Jr., A Fish and Wild/if~ s..rvey of Guatemala, (S pecial Scientific Report-Wildlife, No. 5), (Washington, D .C. : U. S. Department of the I nte rior, Fi sh and Wildlife Service, June 1950) pp. III, 162 (processed).  • INDUSTRY 105 and for export to neighboring countries where demand already exists. A proposal for in international approach to this problem has also been recently advanced, suggesting that Mexico, Central America, and the Antilles could operate jointly two or three efficient fishery centers. These might properly be under the sponsorship of the Fisheries Division of F AO. The experience of Mexico, Costa Rica and Panama in catching and exporting fish and frozen shrimps to the United States might be made available to Guatemala. 5. 0rm:R FOOD PRODUCTS Meat products. An increase in the livestock supply is a pre- requisite to expansion of the meat packing industry. Ex- cellent experience with small but very modern plants is available in Mexico and Texas. Guatemala could benefit from domestic production of the sausage, ham, bacon, canned meats and animal fats now imported; lower prices would mean greater consumption. An orderly slaughtering and meat-packing enterprise would provide, as by-products, better hides for the tanneries; more tallow for soap makers; t.ankage for animal feeds and other uses; and the raw materials for bating enzymes, neats- foot oil, and (together with hide scraps from the tanneries) glue. Milk products. Markets for good quality milk, in every form, are still very limited. This makes it difficult to create a self-sustaining milk industry, however desirable from the public health aspect. Pasteurization and condensed or powdered milk plants should, nevertheless, be progressively developed. Steps already taken in this direction by INFOP will probably have to be followed up by actually setting up a plant, since it is improbable that neither foreign or domestic private interests will expand the industry under present milk price ceilings. • • Current plans, which call for a milk producers' cooperative to establish a pasteurization plant and finally to purchase it  • 106 THE ECONOMIC DEVELOPMENT OF GUATEMALA with INFOP's help, appear sound. The government's policy of rigid price controls may encourage adulteration practices and probably should be eased if the future plant is to function without subsidies. 1 At this stage the Mission cannot recommend expansion beyond what is contemplated, since both supply and demand for milk can grow only gradually. Establishment of a con- densed milk factory in the highlands, as the future center of milk production, should be considered later. Technical assist- ance could do much to improve and develop the production of butter and cheese and the formation of local cooperatives for this purpose should be encouraged in livestock regions. Canned fruits and vegetables. Canning of vegetables, trop- ical fruits and fruit juices could be started, perhaps with INFOP financing. Extensive development in this line will have to await more assured supplies through increased agri- cultural output. It will also be necessary to correct the present poor allocation of the sugar supply, to which reference has already been made. 6. TEXTILES Production of textiles is extensive, as is also the variety of products. Both cotton and )VOOlen fabrics are made. Oper- ations include spinning, dyeing, weaving and knitting, with both modern equipment and hand methods. Raw materials. Until recently only 25 percent of the cotton consumed was produced within the country, the rest being imported. The situation is now being progressively corrected. Guatemala already produces about one third of its cotton needs and may become self-sufficient in the next decade. Storage and ginning capacity-thanks to a recently con- structed plant-is now in excess of requirements, although later expansion must be planned as domestic production increases. Domestic wool supplies a part of the needs. Some local wool is w~shed by prj mitive methods, but a number of the mills find it unsatisfactory for their purposes and prefer to import washed wool from larger producing countries. INDUSTRY 107 Machine-made textiles. Although only a moderate expan- sion of mechanized textile fabric production is indicated at this time, there are several opportunities for economic im- provement in the industry. An expansion of spinning capacity to reduce imports of yarn would tend to make the supply of yarn for the textile indu-stry more secure. From the economic point of view, on the other hand, it might appear sounder to continue importing yarn and utilizing investment resources thus spared in weaving, which creates more employment. A decision on this point can be reached only after a careful examination of costs and supply conditions. Some mills are quite modern while others are using anti- quated equipment which should have been amortized and replaced long ago. Costs could be reduced by the introduction of automatic shuttle-loading looms for white goods. On the other hand, there is only limited justification for such units as pattern-weaving Jacquards at this stage. For textiles as a whole, it would be impractical for Guate- mala to attempt to eliminate imports; for this would call for making too great a variety of products and not enough of each for economical manufacture. Actually it would be advan- tageous to reduce the present variety and to concentrate on a number of principal types such as plain white goods, grey shirting, drills, denims, and appropriate specialities including sheets, blankets, shirting, cotton sacking and knitted articles. Competent observers believe that the present high import duties on textile fabrics could be lowered without harm to the local industry and would tend to limit the excessive profits which restrict the market. The fact that several plants now have difficulty in selling their output is attributed largely to these high profits and their encouragement of competitive contraband. Home weaving. Handicraft weaving, especially in the traditional Indian patterns, is an important segment of the country's textile industry. Its products are attractive largely for their aesthetic value and because they are handmade. Guatemalan patterns are unusually attractive to th,e tourist 108 THE ECONOMIC DEVELOPMENT OF GUATEMALA trade-a fact which will be more widely appreciated when the Pan-American Highway is completed. Production and marketing could be helped by more effec- tive action to certify the quality of the products and, perhaps, by the opening of a wholesale distributing agency in the United States. This applies not only to cotton, but also to hand-woven woolen articles which offer interesting possibilities for expansion. The bulk of ·production is at present sold locally, but the many articles of clothing, the table linen, blankets, shawls and rugs are attractive in design and should be more intensively marketed. An INFOP school for the production of carpets in Quezaltenango is an interesting step towards development of such production. It does not appear, however, that the value and quality of the wool clip would, at present, warrant the expansion of mechanical weaving of woolen fabrics. In the opinion of competent experts, existing mills hardly warrant the protection they receive, particularly in view of the very low wages they are paying despite their protection. 7. SHOES AND LEATHER GooDS Potentially, the manufacture of leather and its products offers an important opportunity for development. Numerous problems-both natural and artificial-now retard its contri- bution to a higher standard of living, but these are not insoluble. Leather. Both vegetable- and chrome-tanned leathers are produced domestically. In general the quality is medium to low, as a result of defective raw materials and poor process control. Much can be done to improve the quality of hides available to the tanneries. They are often badly branded ( on the best part of the flank) and marked with barbed-wire scratches and insect bites. Moreover, careless removal of the hides in the slaughter houses causes an unnecessary number of ruinous "'butcher-cuts". With such defects, production of high-grade upper leather is almost impossible, and shoe manufacturers INDUSTRY l()<J prefer to import it. Payment of more sharply differentiated prices for good and poor hides would help to correct the situation. Tanning is carried Ot\t by primitive methods which pre- cludes uniform quality or color. One reason is that none of the domestic tannins are available in concentrates of known strength. Crude bark, seed pods, twigs and other natural sources of tannin are used directly, except where supplemented by imported material such as Argentine quebracho. 10 Technical investigation into the centralized preparation of tannins from materials such as mangrove bark should be con- ducted. In order to obtain the greatest yield of high-grade tannin economically, the process should be developed as an industry independent of the individual tanneries. Apart from local needs, there is an almost unlimited export market for a good product of this type. With a small but modern meat-packing industry, it would become economically possible to produce not only better hides but also other materials for the tanning industry, such as bating enzymes and neatsfoot oil. For this, however, develop- ment of cattle production remains a prerequisite. Shoes. Most Guatemalan shoes are made by hand. Some of this production is carried on in factories with a few mechani- cal aids, but a large part of it is done in small shops; a number of "factories" farm out their production to in'dividuals working at home. There are two mechanized shoe factories in the Republic. Only one of these, at Cohan, is allowed to manufacture shoes for domestic consumption. Apparently to avoid competition with inefficient hand workers, the Incatecu factory in the Capital is required by decree to export its output.11 As a result, both domestic and imported leather shoes are extremely expensive and most people wear sandals or go bare- 11 An unconfirmed report of quebracho trees in Guatemala is understood• to be under investigation. A similar report from Chiapas, ~Iexico, however, proved to be unfounded. Although in that region there is a tree which local residents call "quebracho" because of its hardness, specimens were found to bear no close relationship to the tannin-bearing trees of the Chaco. u According to earlier technical studies, it appears that the cost of production of shoes at the Incatecu factory is lower than that of the Coban plant. 110 THE ECONOMIC DEVELOPMENT OF GUATEMALA foot despite the fact that shoes are a primary need for health and social welfare. The Mission feels that economic production of shoes through modern industrial methods is the only way to meet this problem. Other leather goods. The development of mechanical pro- duction of shoes admittedly creates a problem of rehabilitation of the present shoemakers. With the opening of greater tourist trade through the Pan-American Hi'ghway, there will be a greater market for hand-tooled leather purses, belts, wallets, briefcases and similar articles. Development of this activity instead of shoemaking as a handicraft industry would appear logical. 8. HABD FIBER PRODUCTS Several kinds of hard fibers · grow in Guatemala, either wild or under cultivation. Some of these can be used for cord- age, but the principal need is for fibers which can be made into satisfactory bags for coffee, corn, sugar, beans, rice and other leading agricultural products. For these purposes sacks are now mostly imported from India (jute), Mexico (hene- quen), El Salvador (sisal) and elsewhere. A small factory has been started to make bags from izote fiber, but difficulties have been experienced in obtaining a satisfactory supply of this fiber. Abaca. Manila hemp, or abaca, is raised and processed to baled fiber by the United Fruit Company, under contract to the U.S. Reconstruction Finance Corporation. Its production is discussed in Chapter II. This fiber is used chiefly for marine cordage because of its resilience under irregular tension and its resistance to salt water. lt makes excellent rope for general purposes but is unsuitable for bagging. There is little domestic demand for it. Maguey. 0£ the several agayes available, maguey find s a local use in handmade rope and heavy cord for noncommercial uses. Although there have been numerous studies aimed at its industrialization in Mexico (where the plant is grown widely for pulque), none has succeeded economically to date. The fiber is inferior, and the market simply does not want it. INDUSTRY 111 Chemical and steam treatments, once thought promising, seem to make it worse. This fiber, too, is unsuitable for bagging, although it has been used for this purpose, as are henequen and sisal to some extent today. But, like abaca, none of these works well in textile machinery, as they are too heavy. Moreover, bags made of them are covered with short, stiff projecting fiber ends which are painful and annoying to workmen carrying cargo. Kenaf. It is largely for the reasons just mentioned that the world has long depended upon jute for bags. More recently it has been found that kenaf fiber has very similar properties to jute and can be grown well in the Wes tern Hemisphere (see Chapter II). It is probable that kenaf offers the best possibilities for bag manufacture in Guatemala, as soon as a few current technical studies in neighboring countries are completed. There is some question, however, as to costs of manufacture. Bags are a cost item to be subtracted from the profits on the coun- try's main export crop. Unless they can be made cheaply, it may prove advantageous to import them from an area of larg~r production. 9. CEMENT One plant in Guatemala City supplies most of the country's cement requirements, except under unusual circumstances such as occurred at the time of construction of the Olympic Stadium. Present capacity of the plant is 200 tons per day, or about 60,000 tons in a normal working year. Storage capacity is about 25,000 barrels ( 4,700 tons). Ample raw material is available locally. Fuel oil is, of course, imported. Increases in the demand for cement, which have been appreciable in the last few years, can probably be met best by expansion of the existing plant for the time being. Irregularities in demand can continue to be filled by importation. The Mission considers this procedure more practical at present than construction of a new plant in Huehuetenango 112 THE ECONOMIC DEVELOPMENT OF GUATEMALA or elsewhere. While special projects elsewhere can call for large quantities of cement at certain times, the most constant market is close to the capital. Erection of a second plant at this time would give neither plant an adequate outlet for an economical tonnage since the present one is about as small as can be ~perated satisfactorily. Improvements in transportation as recommeqded elsewhere in this Report should, by allowing for cheaper imports, go far to meet any threat of monopoly. Electric power for increased production might be obtained by recovery of waste heat from the kiln. This is practiced successfully in Cuba and would be especially valuable in Guate- mala City where available power is limited. Manufacture of cement pipe, concrete building blocks and products of cement with asbestos, such as corrugated roofing, panels, water tanks, pipe and similar products, should be expanded. 10. WOOD PRODUCTS Lumber and wood products, already exploited to a limited extent, are promising fields for industrial development. Re- serves include a wide variety of species, from soft conifers to valuable hardwoods (see also the discussion of Forest Pro- ducts in Chapter II). Of about 100 sawmills in the country, not more than 20 are large enough to be classed as industrial enterprises and few of these are modern. Improvement could be effected through more careful operation, bet.t er grading of lumber, proper seasoning, and in some cases th!'! installation of drying kilns. Sawmill efficiencies could be raised by conversion of slabs and edgings to lath, toys and small articles, and by burn- ing all remaining scrap and sawdust as fuel for power. Without these measures, 25 percent of a log is wasted. Guatemala's first plywood mill recently commenced opera- tion at Morales, Izabal, producing 15,000 square feet of ~ -inch plywood daily. With proper technical guidance there is little doubt that other plants of this type can prosper. Similarly, there is a'market for mass-produced mill-work, windows, doors, trim and low-cost furniture. INDUSTRY 113 11. PAPER A relatively new venture is Guatemala's first paper mill, making cardboard and paper. Present operation is at 30 tons per 24-hour day, using second-hand equipment of the cylinder type. Capacity at higher speed is said to be 45 tons daily. This plant utilizes spent grass from citronella and lemon oil production, as well as all available waste paper. Trials are being made with the fiber tow of abaca. At least part of the output of paper is exported to the United States for box- making. In a market as small as that of Guatemala, paper manufac- ture can be successful if confined to a limited number of types or if based upon a special available raw material as in this case. Production of small lots of paper of different varieties is usually uneconomical, as is also the making of paper to unusual specifications. For example, it is questionable whether Guatemala can afford to make her own cement sacks, which require a strong paper of very specialized properties. Domestic requirements of wrapping paper and box cardboard, however, can well be provided. · 12. CHEMICALS AND DRUGS Acids and salts. One small factory now produces sulphuric, hydrochloric and nitric acids, and sodium sulphite. Develop- ' ment of new industrial capacity in textiles, tanning, fertilizers and numerous other lines would justify increased sulphuric acid production, provided only, of course, that an assured source of enough sulphur or other raw material close at hand could be found. Dependence upon foreign sources may be hazardous. Great improvement can be made in domestic production of common salt. Cont~nued importation of salt should be entirely unnecessary. Fertilizer. With sufficient acid, ample · raw materials ap- pear to be available for the manufacture of super-phosphate fertilizer. Caustic soda. In the manufacture of electrolytic caustic soda the biggest item is electric power; the rest is ordinary 114 THE ECONOMIC DEVELOPMENT OF GUATEMALA water and salt. Great quantities of current are consumed: Until a surplus of hydro-electric power is available, an attempt to make caustic soda would create a power shortage some- where else. Chlorine as a by-product from caustic soda manufacture can be used locally to purify drinking water supplies, or it can be sold abroad under present market conditions. Insecticides. Three available domestic sources of insecti- cides for agricultural and household purposes are fluorides, rotenone, and tobacco wastes, from which nicotine insecticides can be readily made. Quinine. During the last war cinchona plantations were started in Guatemala and Mexico. A satisfactory method for extraction of the quinine and other antimalarial drugs from the bark has been developed. These drugs are needed to help develop the lowlands. 'rt would be useful to explore the possi- bility of utilizing Mexican experience on this particular subject. 13. M!SCELL.ANE~US OOUSTBIAL PRODUCTS Ceramics. Good clays of various types and equally good raw kaolin indicate possibilities for a broad expansion of · ceramic production. Matches. The present match industry offers a typical example of high-cost production, maintained only through import prohibitions. It is to be hoped that the provisions in the ·p resent law for gradual reduction of protection will either make the national industry more efficient, or if this should be impossible, permit foreign competition to be resumed for the popular benefit. Paints, Varnishes and Lacquers. Paint, varnish and lacquer industries would require for their economical development an increased supply of national raw materials, particularly vegetable oils. It would be necessary to specialize in a few types, for too great a variety of such products cannot be pro- duced economically for a small market. Plastic products. Production of small plastic articles could form the basis of some minor industries which could be started INDUSTRY 115 almost at once. Local wood flour, pulp and resin could be used, together with imported synthetic materials. Plastic combs, plates, glasses, buttons and ornaments are among the items which might have a ready market in Guatemala. Rubber products. Local manufacture of rubber goods, except for the simpler types of footwear parts (soles, heels, etc.) which are already in production, appears premature in the present stage of demand. Soap. Despite the shortage of domestic oils and fats, Guatemala manufactures most of the soap she consumes. But the plants are small, often lack technical control and utilize high-priced imported materials (tallow, coconut oil, caustic soda, perfumes, fuel). With a high duty on imported soaps, the local plants make a large profit. Without such a high degree of protection the soap industry in its present form would not exist. The greatest needs of the soap industry at present are a better supply of raw materials, continuous technical quality control and greater diversification of types of products, rather than additional capital investment. Laboratory research on domestic oil seeds, together with greater tallow supplies from increased livestock slaughter, would certainly permit reduction of the tariff with safety and give Guatemalans less expensive domestic soap. Tobacco products. Manufacture of cigars and cigarettes is already well established, at least for the internal market, and does not seem to require any particular effort for its develop- ment. Use of its by-product wastes has been mentioned (see above) under Chemical and Drugs. Yeast. Huge quantities of waste coffee pulp create a dis- posal problem for the beneficios. It is possible that this can be turned to more profitable use. Tests elsewhere indicate that such pulp contains as much as 11 percent (dry basis) of sugars. There is reason to believe that the material could be used to grow a high-protein yeast for cattle feed, while at the same time avoiding the present pollution of streams and other problems. 116 THE ECONOMIC DEVELOPMENT OF GUATEMALA Such a yeast could contribute an additional industrial operation to each beneficio and encourage greater cattle pro- duction as well. IV. Recommended Policies Recommendation No. 25: Retain the general principles of the Industrial Development Law of 1947 in preference to newly proposed legislation. Through the Industrial Development Law of November 1947 (Ley de Fomento Industrial) the Government has provided encouragement to new industrial investments by granting them tax exemptions or reductions for specified periods of time. Industries requesting these benefits are classified accord- ing to their potential contribution to the economy, national necessity, novelty, utilization of domestic materials, domestic capital participation and similar criteria. While some preferences are given to Guatemalan capital, the law realistically recognizes that this does not always work to the national advantage; foreign capital, even up to 1()() percent in some cases, is not excluded. On the other hand, such foreign capital is expected to engage in bona fide indus- trial production. Artful evasion is not sanctioned; mere packaging, or bolting two prefabricated parts together, can- not qualify for tax reductions. Many underdeveloped countries have enacted laws of this type in recent years, with varying results. Under the Guate- malan law, up to June 1950, 78 industries had obtained con- cessions. On the whole, this effort seems to have had a reasonable degree of success, even though in a few cases it may have indirectly subsidized some relatively inefficient industries. It is naturally difficult to determine how many of these new industrial enterprises would not have been established in INDUSTRY 117 the absence of the Ley de Fomento Industrial; but without doubt the law has been helpful. The Mission believes that this law contains many desirable features-not the least of which are its comparative simplicity and realism-a~d that it can continue to render valuable service to development if used with reasonable caution. A proposed new law for the protection of industries was submitted to the National Congress at the end of 1950. This project, in the opinion of the Mission, contains features which are likely to be self-defeating. It would subject protected industries to excessive control by the Minister of Economy, who would have powt!rs to impose quotas of production, to import substitute goods when quotas are not filled, and to grant and withdraw monopolies. As the Mission understands it, the law also appears to offer protection to new industries only on condition that the sales prices of their products are "kept 30 percent under those of foreign products of comparable quality. This last stipulation, although understandable in view of current high-profit practices, appears too drastic. Furthermore, close control of so many business aspects by the Minister of Economy would be difficult to administer in practice and would certainly have a restrictive effect on the inflow of private foreign capital and technology. The Mission feels that the existing law is much to be preferred. Any supplemeotary action should be to remove economic and technical obstacles which have been described in earlier pages, rather than in the direction of extensive legislative changes. Recommendation No. 26: Improve the training afforded by the nation's technical schools. Guatemalan technical schools, such as those at Guatemala City and Retalhuleu, now fall far short of the requirements of the country in regard to faculty, equipment, curriculum and teaching methods. As soon as the necessary number of qualified technical instructors can be made available, these 118 THE ECONOMIC DEVELOPMENT OF GUATEMALA schools should be thoroughly reorganized. Emphasis should be on practical instruction through work projects instead of theory. Closer relationships should be maintained with poten- tial employers with firsthand knowledge of the specific and immediate needs of the country's economy. Immediate attention should be given to the training of mechanics, construction workers, carpenters, plumbers, masons, and both operators and maintenance specialists for agricultural and mining machinery. Preparation of some of these technical workers, such as farm machinery operators and mechanics, might well be done at the existing or proposed regional agricultural machinery centel's (see Chapter II). There seems to be an almost complete · lack of teachers adequately trained for practical vocational instruction and sufficiently familiar with modern machines, tools, shop tech- niques and production methods. Such teachers should be. trained immediately, either by granting a number of scholar- ships for study abroad or by establishing (perhaps under the auspices of the Engineering College of the University of San Carlos) an intensive training course to be given by ~ group of specially appointed instructors who may have to be sought abroad. In this connection, attention is called to the possible cooperation of the School of Industrial Arts of the University of Puerto Rico, which at present is training 2,700 students in mechanics, tool- and die-making, electronics, and other sub- jects. The language of instruction of that school is Spanish and it is adapting United States technology and teaching techniques to an essentially Latin American and tropical environment. For these reasons it may be very useful to have a group of Guatemalan technical teachers trained in Puerto Rico or to engage some Puerto Rican teachers for temporary work in Guatemala. Recommendation No. 27: Attach to INFOP a small group of experienced foreign technologists for continuous industrial aid and research. INDUSTRY 119 In a great many cases, the present brief review of Guate- malan industries has shown a need for major or minor techno- logical improvements that can be carried out only after a detailed study of conditions is made on the spot. In some__:_ such as, for instance, the utilization of waste coffee pulp-an entirely new activity is involved, creating a new type of industry. The initial cost of research and experimentation will undoubtedly have to be borne by a state agency as long as private enterprises in these unproven fields do not exist. For specialized technological studies, temporary technical assistance from outside and the granting of scholarships for training abroad are both useful. Nevertheless, they cannot be expected to solve all problems. Visits from foreign experts are usually too short for detailed technical studies. The train- ing of technicians in foreign countries may give to an indi- vidual a thorough knowledge of inclustrial processes as used in the industrially advanced countries, but such knowledge is often difficult to apply to the particular needs and possibilities of Guatemala. As a si'mple example of this, it would seem useless for Guatemalan technicians to learn the processes used in recovering chemical by-products from cottonseed hulls, since Guatemalan production of cottonseed will probably never be sufficient to allow economical use of such a process. At the same time, through technological research it might be possible to develop a different profitable utilization of the same material in Guatemala, adjusted to local conditions. In the absence of a sufficient number of trained technicians, assistance from abroad is unfortunately necessary. A solution recommended here for Guatemala would be to furnish INFOP with a small nucleu's of foreign technologists, selected so that their combined experience covered a large number of fields. A chosen group of Guatemalan technologists would work side by side with them. In this manner the foreign technicians would get an excellent background knowledge of conditions in Guatemala by their daily contact with their Guatemalan colleagues, while at the same time the latter would learn the latest imported research techniques. 120 THE ECONOMIC DEVELOPMENT OF GUATEMALA Local capitalists could readily consult this group-which would in all likelihood become authoritative-and thus be encouraged to invest in new enterprises; for the availability of qualified and impartial technical help would give them confidence. Where even greater specialization might be needed, the foreign technologists could assist in suggesting specific sources of such help for consultation on special problems. Under INFOP, this group could be expected to render the following principal services: (a) carry through detailed investi- gations recommended in this report, and others that m_ ay pre- sent themselves; (b) serve as a medium for introducing modern techniques, both for the benefit of existing industries and for the establishment of new ones; ( c) help to establish standards of quality for industry; ( d) serve as consultants, particularly for small industries; ( e) s.erve as consultants for potential local and foreign investors; (f) upon request, undertake research projects to be financed by private industry, or by an asso- ciation of industries; (g) prepare irtformative technical or semitechnical buHetins for the advancement of industrial pro- duction; and (h) cooperate with universities, agricultural experiment stations, etc., in their work. Obtaining a really effective and competent foreign group of this kind is the most critical part of the problem. The most satisfactory method would be to select the chief of the foreign delegation with the advice and cooperation of impartial foreign institutions, and then to give him the responsibility of select- ing his colleagues. The Mission believes that if this general recommendation were followed, the Government could relate a lively center of interest for development of applied technology and more efficient utilization of resources.  CHAPTER IV Mining anJ P etroleutn I. Status of Development I. HISTORICAL BACKGROUND Since Spanish colonial times there has been. interest in Guatemala's mineral, resources, and primitive, small-scale mining operations have been carried on for centuries. The principal product was silver, often occurring with lead. Lead production is now more important. Known Mineral Deposits Major known mineral resources of the country include lead, silver, copper, zinc, chromium and bismuth, of which several occur mainly in mixtures or as impurities in lead. Chromium ore deposits in the Department of Jalapa have been worked for some years. Other chrome deposits, said to be of very high grade, have been found near Cabanas in the Department of Zacapa. It has been estimated that chrome production could reach 900 tons per month within three months with simple surface operations. Other reported deposits include antimony, iron (in Chiqui- mula), quartz crystals and bituminous coal, the latter in Alta and Baja, Verapaz and Izabal. None of these have been developed systematically and their extent and quality have not been fully determined. Petroleum Available information suggests the possible existence of some oil in the northeastern part of the country, including sections of the Peten, Alta Verapaz and Izabal, but of this nothing definite is known. The Shell Oil Company once held exploration concessions in eight zones of these three Departments, but renounced them in 1942. After the last war explorations in the same 121 122 THE ECONOMIC DEVELOPMENT OF GUATEMALA general area were made by the Standard Oil Company of Ohio (Sohio), the Atlantic Refining Company, and the Ohio Oil Company. Some geological surveying and shallow drilling for structure has been done on several occasions, but there has been no actual drilling for oil so far. 2. PRESENT MINERAL PBODUCTION Essentially, the geological structure divides it into two parts. The northern section is predominantly limestone, while the southern portion is igneous. A great fold extends across the Republic in an east-west direction, with many branches and parallel strands. The main fold separates the northern limestone area from the southern igneous area and it is along this line that the lead and zinc ore bodies occur. Minor north and south folds localize the ore occurrences along this east- west trend, giving rise to ore districts around Chiantla and Cohan. Statistics According to a report of the Director General of Mining and Hydrocarbons, as of April 25, 1950, there were 206 "mines with property titles", most of them very small. A great many were not being worked and were therefore subject to possible revocation of their titles. Under concessions either granted or pending before the National Congress, mines working at the time of the report included 11 in the Department of Chiquimula, eight in Alta Verapaz, seven in Huehuetenango, and one in Jalapa. · Statistics on the mining output of Guatemala, as reported by the Director General of Mining and Hydrocarbons, evi- dently do not reflect full coverage of the country. Those for 1949, shown in Table XIX, do not include chrome and are at variance with other sources in some further respects. Neither do they include zinc, although it is understood that actual export of this ore only began in 1950. 1 1 Figures from a different source, for 1950, show exports of 2,400 tons of zinc ore from Caquipcc. Zinc is also produced at Mataquescuintla. MINING AND PETROLEUM 123 Mining Regions The leading mining area is near Cohan. Here zinc pre- dominates over lead by about two to one, with some silver, very little copper and only traces of gold. The zinc and lead ores are of very high grade. Reports of chrome and coal in this area have not been verified. · At Caquipec, in this region, a United States company has re- cently invested about ~1.5 million 2 , including nearly ~850,000 for exploration and development, in a new lead and zinc mine • employing 325 Guatemalans and 10 foreigners. Production of concentrates, now reported at almost 2,000 tons per month, is only one third of the estimated potential. It has been stated that to bring the mine to its full output would require a further investment of ~1.5 million for mills, power plant and mining equipment. Near San Miguel Acatan, in the north-central part of the Department of Huehuetenango, lead output is soon to be expanded and modernized. A United States company is investing over one million quetzales in the building of an access road, flotation plant and smelter for a capacity of 200 to 250 tons daily, and is expected to get into operation in 1951. Deposits of coal, iron, copper and rock salt have been reported in the same zone. TABLE XIX VOLUME AND VALUE OF M IN ING O U TP U T, 1949 Volume Value (kilograms) (quetzales ) Lead, metal ..... .. ...... .. ................ ... 68,401 8,580 Lead, concentrates ................. .... . 25,056 8,863 Lead, ore ............ ......................... . 762,655 237,491 Lead, silver, copper and bismuth concentrates .. ..... .. .... . 267,970 26,558 Silver, concentrates ... . 2,535 30,332 Copper, concentrates ........ ........ .. 10,982 3,309 Total .............................. 1,137,599 315,133 SouacE : Directorate General of Mining and Hydrocarbons. 1 As of June I, 1950.  124 THE ECONOMIC DEVELOPMENT OF GUATEMALA A Guatemalan enterprise has developed a third region, around Mataquescuintla in the Department of Jalapa, for silver, lead, copper and (it is understood) zinc. II. Factors Affecting Mining Development 1. TECHNICAL INFORMATION • On the whole, Guatemala's knowledge of her own mineral resources is scant, spotty and far from accurate. Of the few deposits that are worked today, a substantial percentage were known to the early Spaniards and there has been little progress since. Exploration has been confined to surface prospecting for outcrops; unsatisfactory at best, this method can produce even less in a country 80 percent of whose surface is covered with clay and earth. Yet some of the clay itself may represent mineral wealth. Traditionally the quest has been for metals almost exclusively. It is probable that numerous deposits of valuable nonmetallic minerals have been passed by. Actually, in many cases these offer a better chance for creation of domestic industries than do the metals, for the latter often requires smelting and refining facilities out of proportion to local supplies or markets. Not only is basic information on mineral resources lack- ing, but there is an acute scarcity of domestic personnel trained in geology, minerology and mining technology. The two shortages are related, of course. Under such conditions, domestic capital is not easily enticed into mining ventures. Mineral development is a highly technical subject. Without properly trained and experienced help the capital risks are great. 2. MARKETS Unless he is producing one of the few principal metallic minerals, it is not easy for a Guatemalan mining operator to find the best markets for his output. With domestic industry undeveloped, generally he must look to foreign buyers. His means for finding these are limited. A market information MINING AND PETROLEUM 125 center, . perhaps as a free service of INFOP, might help this situation. Within the country there is a market for limestone products, in the building trades, leather tanning and the sugar industry. A small local market for lead and zinc exists. The banana plantations require at least 40 tons of copper sulphate per day for spraying. All of this could just as well be produced domestically. New industries, when and if established, can absorb quantities of other minerals. If reasonably good coal really exists in Guatemala, it may lend itself to low-temperature carbonization to provide a substitute for domestic charcoal. In this way Guatemala may escape the fate of. her neighbors whose forests are already dangerously depleted by charcoal-making. Under existing world conditions, it can be safely predicted that lead, zinc, chromium and possibly other ores, will find a ready market with attractive prices in the United States during the next several years. 3. TRANSPORTATION The greatest single prerequisite, if Guatemala is to take advantage of this market, is transportation. Existing public roads (see Chapter V) are so inadequate that most mining ventures tend to. be marginal because high transportation costs absorb nearly all of the potential profit. This is true even though the larger new mining enterprises have invested heavily in access roads to connect with the nearest public highway. At present most of the output of Caquipec has to be carried by truck to El Rancho, and from there by rail to Puerto Barr~s. All ore must be bagged for rail transportation. The transportation cost by this route is ~25 per ton, as against about eight quetzales if the ore could be removed by highway and · barge to Puerto Barrios via El Estor. 4. PRODUCTION COSTS Present mining companies complain of high production costs in addition to the transportation problems. Of great 126 THE ECONOMIC DEVELOPMENT OF GUATEMALA concern are the delivered costs of fuel, explosives and mining supplies. Actually, part of the blame for these costs rests with the transportation system. It is just as expensive to take supplies in as to get the ore out. In some cases, however, high import duties or unreasonable profit-taking by importers and agents may be a contributing cause. Finally, it is an inescapable fact that the original prices for these items have risen, under the same influences that are raising the prices of the ore itself. 5. LEGISLATION Mining opinion is divided on the efficacy of present legal regulations on subsoil resources. The Mission makes no attempt to judge the dispute, but offers some observations which may be pertinent to current discussion. Mining Code The National Mining Code now in effect dates from 1934. Its age in itself is nothing against it, for to some members of the industry it appears quite satisfactory. There are others, however, who feel that it is obsolete and unnecessarily compli- cated, and that the process of obtaining permits is so slow as to interfere with normal mining progress. For its part, the Mission believes that m~ning legislation anywhere should be designed to conserve a nation's resources against waste, yet should be liberal enough to encourage vigor- ous development in the national interest by those who are willing to take the risks of investment. Perhaps the present Mining Code meets these conditions. If it does not, then this should be the goal in any s.evision that might be under- taken, however Guatemala chooses to attain it. A number of specific suggestions for improvement have been put forward by various members of the mining industry. They are offered here, not necessarily as opinions of the Mission: (1) Larger areas should be allowed for exploration and more time to explore them, conditioned on the re- sponsibility and serious intentions of the applicant. MINING AND PETROLEUM 127 A period of five years should be granted for explora- tion. (2) The size of a denuncia ( claim) should be increased to 30 hectares, if desired by the applicant, an·d there should be no limit to the number of denuncias if the presence of minerals is established. (3) A mining denuncia should carry the right to mine all minerals found, except those specifically reserved for the State. (4) Congressional approval should not be required for an additional denuncia added to an original concession. (S) The right of underground trespass on adjoining prop- erties should be recognized, when necessary for the exploration or exploitation of any concession. (6) For purposes of taxation, gross value of the mine product should be clearly defined. (7) During the life of a contract, additional mining taxes not provided for in the contract or which did not exist when the contract was executed, should not be levied on the concessionaire. (8) Where more than one surface landowner is involved in any one mining concession, the concessionaire should be permitted to pay the one percent royalty due the landowners into the national treasury for distribution by the Government and should be relieved of a•y further liability in this respect. (9) Mining interest should be permitted to engage foreign technicians whenever equally qualified Guatemalans cannot be secured and administrative procedures necessary for such permits should be simplified and speeded up. (10) Modification of the Mining Code, or the passage of new laws affecting mining in the future, should not be made retroactive on previously granted mining concessions. This Mission has been informed that a draft for a new Mining Code is now being prepared in the Ministry of Econ- 128 THE ECONOMIC DEVELOPMENT OF GU:ATEMALA omy and Labor, but has not been able to obtain any information concerning the content of this draft. If a revision of the Mining Code or the adoption of a new one should be decided upon, the preceding points might well be considered carefully as means of stimulating the necessary development of the mineral resources of the country. Petroleum Legislation Article 95 of the national constitution provides that, "deposits of hydrocarbons and their derivatives may be ex- ploited exclusively by the State or by Guatemalan companies whose capital is pre4ominantly national". Their ownership is permanently vested in the nation. However, Article 12 of the Petroleum Law of 1949 provides for contractual arrangements with foreign oil operators who might undertake, in behalf of the State and under its direction and supervision, the exploration, exploitation, transportation and refining of oil. In making such contracts, preference is to be given to enterprises willing to supply the necessary capital, machinery, equipment and technical personnel. All equipment installed by the contractor automatically becomes the property of the State. The contractor is to be reimbursed for .h is expenses, during the life of the contract, with oil to be drawn from any deposits found within the assigned area of exploitation. Until the contractor's investment has been amortized, the State will receive at least 12,0 percent of the gross productiln, and there- after a larger proportion. Other provisions of such arrange- ments are set forth in minute detail in the Law. This pattern might be thought to establish a wdrkable basis. It is not without precedent, however, and no wholly satisfactory results have been experienced anywhere else under this arrangement. In Guatemala, notwithstanding the- creation of the National Petroleum Institute in 1948 and the Petroleum Law of 1949, the situation has remained static. In the six years since adoption of the present constitution no national interests-either private or public-have shown themselves willing or able to initiate effective oil development. MINING AND PETROLEUM 129 Evidently there is no private capital in Guatemala prepared to undertake the large risks and expense involved in petroleum exploration. Joint ventures of Guatemalan and experienced foreign capital do not seem feasible without allowing a control- ling share to the latter, which is excluded by the constitution. It is unlikely that the State, with so many more pressing needs for its funds, will be in a position to make these necessarily large investments in the near future. It appears highly probable, therefore, that the constitu- tional restrictions will continue to limit national petroleum activity to small-scale wildcatting in a few fairly accessible regions, such as around Lake Izabal. III. Recommendations Recommendation No. 28: Establish a continuing Geological Survey and Assay Service under the Directorate General of Mining and Hydrocarbons. Regardless of other factors, mining cannot develop rapidly unless people know what to mine and where to find it-or at least where to look for it. This calls for a much better knowl- edge of the geology of Guatemala than now exists. One of the best promotional services that the Government can render in the mining field, therefore, is a continuing geo- logical and mineral survey. Nor is its value limited to mining, for the technical information collected by such a service can be of enormous benefit in the planning of public construction projects such as highways and dams. A survey of this kind is not accomplished as a big project in a short time. It is best done by patient work on a modest scale, over many years. A few experienced specialists working on the ground, with the assistance of a small assay laboratory to measure and confirm their findings, will be of greater con- crete value than a broad but hurried survey of "possibilities". Initial work should eipphasize identification of the minerals themselves, rather than the more classical studies of the interesting geological processes that put them there. Special 130 THE ECONOMIC DEVELOPMENT OF GUATEMALA attention should be given to nonmetallic minerals which could support new domestic manufacturing industries-such materi- als as ceramic clays, kaolin, talc, feldspar, fluorspar, quartz, silica sand, gypsum, limestone, asbestos, sulphur and salt. The reported coal deposits should be investigated. Geological map files should be organized and additions made to them as information is gained. Samples should be collected and analyzed. Test borings should be made in promis- ing zones. If adequately trained technical specialists for these purposes are not available domestically, they should be ob- tained abroad. Ultimately, the most thorough work will require aerial mapping, a task already begun in a few areas. It may also call for more expensive drilling, tunnelling, magnetic mapping and geophysical prospecting. Whenever competent private interests, either national or foreign, are willing to undertake some of these tasks and thus relieve the pressure on the public treasury, it would seem to be in the best national interest to give them all possible assistance. Recommendation No. 29: Examine present petroleum legislation to determine whether it is actually accomplishing what Guate- mala desires. At the present time Guatemala is not considered by oil experts as a particularly attractive field. This is caused by: (1) uncertainty about the existence of large oil deposits; (2) the high cost of exploration and development in low-lying tropical regions lacking transportation and other basic facili- ties; (3) the legal situation and general atmosphere toward foreign participation in oil development; and ( 4) the compara- tively more favorable conditions found elsewhere. It is certain tha1: Guatemala is well aware of the advantages of domestic petroleum production. In 1949, she spent about 6.8 percent of the total value of imports-the equivalent of more than ~4.6 million in foreign ~xchange-on petroleum and its products. This included ~2.2 million for crude petro- leum and fuel oil, ~2.1 million for gasoline and kerosene, and MINING AND PETROLEUM 131 ~316,000 for lubricating oils. Yet the industrialization that consumes these products has only begun. To this must be added the threat of another world war, which may once more interrupt the normal external sources of supply. The decision as to whether foreign interests should be permitted to undertake oil exploration and production for their own account in Guatemala is a matter to be decided exclusively by the Guatemalan people. The Mission must con- fine itself to pointing out that the prospects for early opening of potential oil resources in Guatemala would be more favor- able if the present constitutional restraint on oil exploration and production by foreign-controlled interest were relaxed. It is clear that any responsible outside organization would need greater inducements than at present in order to justify the necessary expenditures and risks. lt is therefore recommended that the question be examined in relation to whatever result is really desired. If Guatemala hopes to attract the help of experienced companies under the general arrangements of Article 12 of the Petroleum Law, it may be necessary to concede a few relatively minor points, such as the following: (l) A three-year test period for exploration (Article 12, Item 6) seems too short in view of the difficult local conditions. This period should be extended to at least five or even 10 years. (2) The law (Article 12, Item 4) now provides that "the State must acquire property title to the machinery, equipment and other materials employed in the indus- try, from the moment at which they are acquired by the enterprise (contractor), and their value must be amortized with the products. If the value of these products does not cover the value of this equipment, the State reserves the right to pay the difference in cash". This is not always satisfactory, especially when equipment is hard to get. If oil findings are unsatis- factory, the State should return to the contractor the title to the equipment and permit him to take it out of the country.  CHAPTER. V Transportation I. Survey of Existing Conditions The inadequacy of present facilities for transportation probably constitutes the greatest single barrier to the economic development and the cultural integration of the Republic. The country's surface transportation in all its forms is on the whole insufficient. This can be attributed largely to the difficult physical conditions and to the relatively low levels of public investment and of private income. Most Guatemalans find rail and motor transport so expensive in relation to their income levels that they are unable to make daily use of such facilities and consequently have to resort to ox-cart, pack- horse and human carrier. The isolation of rural communities and villages and the difficulty of highway travel aggravate the situation. As a re- sult, agriculture and industry have not developed in many areas reported to be potentially productive, while such agriculture and industry as does exist have been seriously handicapped. In any examination of transportation in Guatemala, it is at once clear that development has been impeded by physical conditions, finances, and shortage of professional personnel and skilled labor. But this is not all; for there is evidence of a lack of planning with a consequent scattering of national resources over too many projects instead of a concentration on projects essential to the country's development. Responsibility for constructipn, operation, maintenance and policy control of the transportation and communications systems ranges all the way from a completely governmental function as in the case of highways to the completely private function carried on by the International Railway of Central America. Between these two extremes fall those operations conducted by private enterprise under varying forms of per- mits, contracts, or agreements with the Government '":hereby 132 TRANSPORTATION 133 each reserves a certain amount of control. The patter~ of taxation, or requirements for profit-sharing between the Government and the private enterprises engaged in these projects, also varies widely. Within the governmental structure various ministries, semiautonomous bureaus and government-owned companies are each concerned with, and responsible for, one or more functions pertaining to various forms of communications. Although a certain amount of coordination between govern- ment departments is provided for by law, especially in the fields of planning and new construction, there appears to be very little actual integration at present. Highways A relatively large system of narrow highways has been constructed throughout most of the populated area of the Republic. These form the backbone of transportation in general, although there is no highway access to the Atlantic seaboard. The system may be described as an overextended, poorly located network of low-grade, narrow roads. Main- tenance is handicapped by the types and extent of the roads, by climatic and geographic as well as geological conditions, and by shortages in equipment, technical personnel and funds. The result is that, in spite of the interest and alertness of the Directorate General of Highways, maintenance has been in- adequate and large sections of the highways are in poor condition. Notwithstanding their primitive condition, the highways are reasonably adequate for all essential transportation require- ments except heavy commercial hauling. Thus commerce keeps moving, expensively and slowly, but surprisingly well under the circumstances. The need for a program of improve- ment is recognized by the authorities and it is understood that such plans are now in preparation. This problem will be examined at g~eater length in subsequent pages. Railways By far the most important single element in the trans- portation system is the International Railways of Central 134 THE ECONOMIC DEVELOPMENT OF GUATEMALA America, a fairly efficient road employing a substantial skilled and unskilled labor force. The IRCA carries a heavy tonnage of export, import and domestic cargo, connecting both the highlands and the rich southern coastal areas with the ports of the Atlantic and Pacific Oceans. It brings the Republic of El Salvador in touch with the Atlantic coast of Guatemala and in this way also receives additional revenue. Although the IRCA is criticized on the ground that it allegedly offers slow and discriminatory service at high rates, it nevertheless has become a major artery through which flows a substantial portion of Guatemala's economic life blood. Its contract with the Government and the various decrees under which it was constructed and is now operating have, however, given it a preferred position with reference to taxation, service charges and control of its own operations. Such preferential treatment is the source of resentment on the part of some elements of both the Goverment and the public, who charge that the original circumstances under which such concessions may have been justified no longer exist. The only other railways in Guatemala are those of the Compania Agricola de Guatemala and the United Fruit Company (operating within the lands of the Company) and the Ferro- carrill Verapaz, a government-owned, short-line road operating in the Polochic River Valley. Waterways Improved waterways, except for port areas and the Lake Izabal-Rio Dulce system, are practically nonexistent in Guate- mala. The Chiquimulilla-San Jose Canal, on the south coast, is little used. Natural waterways, in the form of partially navigable rivers, are employed in the Peten and other northern and northwestern areas for small movements of specially adapted commodities, such as logs, but their value is greatly reduced by their isolation and inaccessability. Seaports are limited, in practical effect, to Puerto Barrios on the Atlantic and to San Jose and Champerico on the Pacific, with the last-named carrying no commerce of conse- quence. TRANSPORTATION 135 Airways Domestic airways are limited to the Compania Guatemalteca de Aviaci61: (more commonly known as "Aviateca") and a few small independent operators furnishing passenger-taxi service. ,Pan American Airways is by far the largest of the international airlines operating in that area-with Transportes Aereos Centro Americanos (TACA) a good second, especially in the carriage of air freight . A third, "Skytrain", was on the verge of ceasing operations at the time the Mission left Guatemala and offers no competition to the others. The only international air-stop is at Guatemala City where a good airfield is in operation. All other commercial airfields, except that at Puerto Barrios, are unpaved and the majority are low-grade, potentially dangerous fields. These and other aspects of air service will be discussed in appropriate sections of the present chapter. II. Basic Factors Affecting Development of Transportation In considering any plan for improvement of transportation, it is necssary to take into account certain physical and eco- nomic factors peculiar to the country; for these must influence greatly the planning of facilities, speed and cost of construc- tion, and conditions of ultimate operation. Topographical DiHiculties A brief description of the geography of Guatemala has been given in Chapter I. It is, however, pertinent to empha- size here a few features applying specifically to transportation and physical communications. The western extremities of the southern half of the Republic are mountainous, the eastern extremities lower and much less rugged. Surface transportation between these areas at present is difficult at best; in the less-developed portions areas such as the Peten. Heavy rainfall in the highland it is practically impossible, as it is also in other more isolated 136 THE E CONOMIC DEVELOPMENT OF GUATEMALA regions tend s to increase damage to highway systems, as well as interfering with air transport in those areas. Much of the highland terrain is covered with a compact but easily eroded volcanic ash-sand mixture, with little ledge or hard rock intermixed. Areas or pockets of this material contain boulders, generally or smaller sizes. Most of it is stable if undisturbed and much of it will stand on nearly vertical slopes if not subjected to wash action. When disturbed and subjected to scour, however, it erodes rapidly and tends to slide. On the other hand, such soil drains rapidly. Moreover, ordinarily it can be reworked easily by road machinery or even by hand. The nature of this soil permits its use as a sur{ace material on low-grade highways and also allows the general use of unpaved airfields. The low clay content reduces the formation of mud. Heavy dust during the dry season, however, is a menace to safety. All of these factors materially affect the difficulties and cost of construction and maintenance of transport facilities and of their operation. They have naturally influenced the choice of facilities constructed in the past, as well as their present condition. Distribution of Population and Production Geographical distribution of population and the develop- ment or potential development o~ agriculture and industry in certain areas have maintained a continuous influence on trans- portation facilities. By far the greater part of the population and industry, both agricultural and nonagricultural, is concentrated in that portion of the Republic lying south of a line through Huehue- tenango, Cob.in and Puerto Barrios. Within this area, the majority of the population lives in the highlands extending west from Guatemala City. The bulk of agricultural produc- tion is divided between the coffee-producing belt of the highlands and the fruit-producing areas of the Pacific Coast lowlands. TRANSPORTATION 137 These factors have been responsible for the heavy pre- ponderance of transport facilities constructed in the southern highlands and on the Pacific coast, as contrasted with those north of the line. The need for access to th" Atlantic Ocean, both from the southern highlands and Pacific coastal areas and from the Cohan area have led to the only exceptions to this situation: (1) the railway along the Motagua Valley to Puerto Barrios; and (2) the Polochic Valley-Lake Izabal trans- port system which now, for all practical purposes, also termi- nates in Puerto Barrios. Labor Supply Concentration of population in the highlands provides transportation facilities in that area with a reasonably ade- quate supply of unskilled labor and with some, but not all, of the skilled labor required in construction and maintenance work. In underpopulated areas such as the Peten, on the other hand, even the simplest type of construction requires the importation of labor, together with provision for housing in labor camps, transportation of personnel and "housekeeping" supplies en route to and on these works. Operation of mechanical equipment of any type requires trained personnel. The only railway undertaking of any conse- quence in the Republic-that of the International Railways of Central America-appears to have met this need by systematic on-the-job-training of its employees during its long period of operation. Machine operators in the construction field, how- ever, are not at present available in adequate numbers to permit any rapid expansion of a highway construction pro- gram. An essential ingredient in any such program must be some system of on-the-job training such as that which was used earlier and with some success as a means of obtaining operators for equipment on the Pan American (Franklin Delano Roosevelt) Highway. Shortage of workers is not such a problem for waterway projects. For some time these will probably remain small in scope except at Puerto Barrios, and in that area there has been enough such work in the past to train an adequate supply 138 THE ECONOMIC DEVELOPMENT OF GUATEMALA of workers for normal operations. Nor are air operations materially affected at present, since the base of all commercial air operations in the Republic is at Guatemala City where a small but suffici~nt supply of air-mechanics appears to be available. Engineers Professional engineering skills are scarce in all fields. This deficiency may take years to overcome, even though a special effort is made by the Government to foster the technical education of young men having a good basic scholastic back- ground. Until this deficiency is overcome the Mission feels that the only means of easing the present critical situation is for the Government to attract foreign technical and professional per- sonnel to Guatemala. Whenever modifications of law and policy are required to promote that end should be taken, including removal of any existing limitations on the employ- ment of foreign personnel in operations of a technical nature. Improvement in this phase of the specialized personnel supply should be reflected quickly in improved operations and reduced costs. Meanwhile, the present engineering shortage will have an important bearing on the development of new projects, as well as on the maintenance of existing facilities; for everything must be adjusted to the availability of pro- fessional personnel and skilled labor. Consequently, even when adequate funds are available for these projects, Guatemala must expe~t a slower rate of progress than is possible in more highly developed countries: Rates and Charges The price which the public pays for a service such as transportation, power, communication or any public utility affects its use by the public and, therefore, its development. A fine balance must be struck; too high a rate discourages the use of the service, while too low a rate forces the operator out of business. Without governmental control and without the tempering effect of serious competition from other companies or enter- TRANSPORTATION 139 prises, a railway or motor-truck company ( or a power or tele- phone company) may be expected to attempt to charge all that the traffic will bear. The result is likely to be ~e establishment of excessive rates at the expense of the public. Two remedies suggest themselves. One-the most obvious-is to establish a sufficient measure of government control to insure that rates and ch3:rges are fair to both carrier and shipper. The other is to introduce competition where that is possible. Each of these devices will be examined in this chapter. It is, however, pertinent to state here that the utmost caution must be observed in any comparison of rates between various utilities in the same areas or between the same utilities in different areas. Different employment practices and scales of labor costs, inequalities in taxation, financial structure, the terrain over which the utility operates, differing costs of materi- als and equipment, differing climatic conditions, volume of operations, competition between utilities of similar or competi- tive character, and the extent of government control all affect rates and charges. These factors and the need to protect the public while permitting the utility to earn a fair return on its investment have made the establishment or modification of rates a specialized field of technical study. Today in such countries as the United States and Canada such studies are carried on constantly in the traffic departments of the larger industrial and commercial utility companies, and commissions and boards have been established in numerous countries by national, state and large municipal governments, for the purpose of controlling and adjudicating utility rates and charges fairly. Planning As already noted, lack of adequate coordination and plan- ning has been at least partially responsible for the present unsatisfactory state of the country's transportation system. The Mission proposes, in subsequent pages, some measures designed to give Guatemala a greater degree of control and coordination in this function than now exists. At the same time an attempt has been made to assist in the creation of a suitable 14-0 THE ECONOMIC DEVELOPMENT OF GUATEMALA plan of transportation development by making a series of concrete suggestions based upon the Mission's analysis of present conditio•s. In outlining the projects which are considered essential to the national economic development, it is recognized that to accomplish all of them will require energetic action over a number of years. A few steps of an emergency nature are included, therefore, in order to provide early partial relief in certain areas where costly projects cannot justify a high priority at this time. Finally, the Mission has indicated a number of projects, currently under consideration, which we believe should be abandoned or indefinitely postponed in order to conserve the financial and human resources of the Republic for projects which contribute more to the country's devel- opment. Costs It is always hazardous to offer preliminary estimates of cost on construction projects because of a popular tendency to regard them as firm price quotations. It is, therefore, most important to realize that accurate estimates of costs cannot be determined without definite plans of projects, engineering surveys, and reasonably detailed and accurate data concerning the costs of similar work in the same general areas. Variations in types of material, in difficulty of access, in elevations and slopes, in rainfall, in quality and availability of labor, and in equipment, all affect costs. Quantities of materials to be moved, and of those to be procured, cannot be computed, nor can unit costs be calculated without detailed surveys. The selection of exact routes to be followed requires painstaking examination of terrain by experts in that branch of engineering. Even if complete surveys are made, accurate estimates are sometimes difficult because of constantly chang- ing costs of materials and labor. It was outside the scope of the Mission's work to formulate definite plans for specific projects or to carry out detailed engineering surveys. The Mission has, however, examined the general condition of existing facilities, and has attempted  I TRANSPORTATION 141 to determine along broad lines the types of improvement or the location of new facilities which appear justified, and to ascertain such local cost factors as are applicable. Cost esti- mates based on such general conditions cannot be accurate but they can be valuable and realistic guides. It is emphasized, therefore, that all cost estimates given in this chapter are general approximations only, and should be used solely as guides in the determination of construction and fiscal programs. III. Governmental Policy Recommendation No. 30: Create a nonpolitical Public Utilities Commission, with powers and duties defined by law, to review and regulate rates, charges and services for all forms of transport and other public utilities. (Probable annual cost: ~50,000 to ~100,000.) Legally, extensive authority over rates and services in the communications field is now vested in the Directorate General of Industry, · Commerce. and Controls of the Ministry of Economy. In practice, however, exercise of this authority appears to be limited to regulation of the motorbus industry, which is controlled by permit with rates fixed by the Government. · · Railway rates on the International Railways of Central America are now exempt from governmental control within the maximum limits established by agreements in force. Motor truck and inland waterway transport rates are currently determined by individual owners and operators. Air trans- port rates for domestic movement appear to be fixed arbi- trarily by the carriers themselves (the principal one being the government-owned Aviateca). Water terminal charges are established by the owning and operating companies under existing contractual agreements. It is evident that there is need for rational adjustment. On one hand, complaints of high rail, terminal and telephone 142 THE ECONOMIC DEVELOPMENT OF GUATEMALA rates are common. On the other hand, some motorbus opera- tors and A viateca are reported to be in financial difficulties, one cause of which may be rates too low to permit success- ful operation. A primary requisite for the profitable operation of a privately owned carrier is the establishment and maintenance of rates which will permit it to defray operating costs, main- tain and replace equipment, liquidate its financial obligations at a reasonable rate and pay a fair return to the stockholders on the funds invested in the enterprise. If the term "return to stockholders" is replaced by "interest to the national treas- ury," this statement applies equally well to a government- owned c;i.rrier. On the other hand, the public-dependent upon the carrier for its transportation-also requires protection against excessively high charges and inadequate or discrimina- tory service. Where the proper lines should be drawn in the matter of rates and services is a difficult matter to determine and one which requires careful study by broad-minded, experienced and competent persons operating in a quasi-judicial capacity and removed from political pressures and influences. Neither the interested carriers nor the normally constituted bureaus of the executive branch of the Government can be expected to approach such questions on a completely neutral, scientific basis. Special provision must be made for meeting these requirements. A Public Utilities Commission of properly qualified c'iti- zens, selected on a nonpolitical basis and operating under appropriate statutes, would probably provide a suitable solu- tion to this problem. The establishment of such a Commission would protect and balance the interests of both the public and the carriers. It should also go far toward supplying the coor- dination now lacking among the various carriers in connection with rates, services and conditions of operation. In its powers and duties this Public Utilities Commission should be generally similar to the Interstate Commerce Com- mission in the United States, but with a broader scope of ac- tivity. It should be authorized by law to approve or reject, in TRANSPORTATION 143 the public interest, all proposals or applications for the estab- lishment of new services and for the termination of existing ones. It should review and regulate all rates and charges for services rendered to the public by public utility companies or private companies performing similar services and it should also review and regulate services rendered by those enter- prises. The scope of the Commission's jurisdiction should include: all carriers, (rail, road, water, air and pipeline) operating wholly or principally within the boundaries of the Republic; all port operations such as wharfage, loading, discharging, lighterage, towage, drayage, storage, and related services; and all telecommunications facilities serving the public. Other utilities, such as electric power, gas, water supply and similar services, could be added as found desirable. The Commission should be charged by law with the duty of conducting its operations on a fair, impartial, and nondis- criminatory basis, and .of safeguarding equally the rights of the public and of the companies or individuals furnishing services to the public. When control is exercised, the process should be carried out with due regard for all existing con- tracts, agreements, permits or decrees under which transport or other utilities are now operated. Necessary adjustments in each case should be made by negotiation rather than by arbitrary action insofar as the national interest permits. A technical staff, fncluding rate experts for each type of transport, would have to be provided to assist the Commission if it is to be effective. Existing administrative machinery of the Directorate General of Industry, Commerce, and Controls in the Ministry of Economy and Labor, now dealing with com- munications, might well be used initially as a temporary secre- tariat for the new Commission. • Not until provision is made for such an agency should the Government attempt to extend its control over rates on serv- ices beyond that now in effect. 144 THE ECONOMIC DEVELOPMENT OF GUATEMALA Recommendation No. 31: Seek by negotiation to modify the existing agree- ments between the International Railways of Cen- tral America and the Government in order to achieve the following objectives: (a) To make possible the construction of a modern cargo-passenger pier at Puerto Barrios by the Com- pany or the Government or both, as may be arranged by mutual a.g reement. (b) To aHord the Railway Company opportunity to include the new pier in the terminal operations now conducted by the Company, as an alternative to its operation by the Government or by another private company. (c) To provide for control of rail and terminal rates and services by the proposed Public Utilities Com- mission. Conditions at the time of construction of the Railway may well have justified its owners in asking-and the Government in granting-the unusual concessions embodied in its contract. But much time has passed and the economic and political con- ditions of the country have changed in ways that could not have been foreseen. Today both parties should give thought to revision or modification of the agreement. The Railway itself can gain substantially by voluntary ac- tion of this kind, which would improve its relations with the public and the Government. At the same time, a revision offers more specific benefits to all concerned, •of which the principal ones are discussed below. Construction of a New Pier The need for additional pier space on the Atlantic Coast is emphasized under Recommendation No. 47 of this chapter. From all standpoints, the most logical location for this added facility is in the port area at Puerto Barrios now served by the et isting pier owned and operated by the IRCA. Unfortunately, existing relationships make the logical course the most difficult. Under present agreements between the Government and the Company, the Government has, in effect, foregone the right TRANSPORTATION 145 to develop areas along the Puerto Barrios shore contiguous to the present pier; nor can it construct competitive railway facilities within certain distances from existing IRCA tracks. On the other hand, it is questionable whether the IRCA has the right to build a new pier without a partial modification of existing agreements. Furthermore, construction of the pier alone would be only a half-measure, since its full advantage could not be realized unless adequate rail service and connections were assured. These can best be provided by the Railway Company. But this, too, may require a modification of certain elements of the existing agreement. In short, under present conditions neither the Government nor the Railway Company seems willing to take steps toward the construction of a new pier properly located with respect to the existing facilities. The Government may be reluctant to negotiate the con- struction of a new pier for fear of adding to what is already con- sidered the Railway's monopoly in Puerto Barrios, and also because of an understandable desire to seek relief and avoid further friction .by constructing port facilities elsewhere. Yet as a matter of fact, construction of such a pier and its service facilities by a private company, under suitable agreements with the Government, would relieve the Government of a relatively heavy financiali. burden and permit it to devote its resources to • other essential projects less suited to private investment. Loss of some existing advantages by the Railway may occur if any revision of the contract is attempted. However, pros- pective compensation in the form of added business should off- set this loss in great part. Operation of the Pier Another element to be considered is the operation of the pier after completion. From the standpoint of economy and flexibility it would be vastly better for the two piers to be operated by one organization as a single terminal. In this way one staff could supervise the two operations, the combined cargo-handling equipment could be held to a minimum, a single labor force could be utilized, and men and equipment could be shifted as needed between piers. 146 THE ECONOMIC DEVELOPMENT OF GUATEMALA A satisfactory operating agreement between the Govern- ment and the Railw~y should not be difficult to arrange if the negotiations are entered into in a spirit of fairness and co- operation. It should be understood from the start that opera- tion by the Railway, while not the only course, is nevertheless preferred as an alternative to operation by other agencies. Rate Control In any negotiations concerning control of rates, definite provision should be made to safeguard the private capital invested in both the existing project and in the proposed ex- tensions, as well as for the maintenance of terminal and cargo- handling rates which will permit the Company to earn a fair return on its investment. At the same time, provision must also be made to insure nondiscriminatory service at reasonable cost to the public. Since, at present, IRCA is exempted by contract from rate- control by the Government, this provision of the proposed operating agreement also would require a partial modification of the existing contract. Again it would appear only fair to offer an opportunity for expanded operations as an offset to the possible loss of revenue through control of rates by a body other than the Company. · • Early creation of the nonpolitical Public Utilities Commis- sion for approval of rates and services would appear to be an essential prerequisite to discussions of this phase of the prob- lem; for the actual existence of such a body, with properly selected personnel, should go far toward allaying doubts as to the impartiality of the agency in executing the rate control function if agreement is reached. Recommendation No. 32: Expand the capacity of the Customs Service. (Estimated cost: not more than ~250,000.) Specific improvements should include: (a) completion of the customs warehouses now under construction in Guatemala City; TRANSPORTATION 147 (b) construction of additional warehouse space at Puerto Barrios, and elsewhere as needed; ( c) faster examination and processing procedures; ( d) enforced removal of consignees' goods from the cus- tody of the Customs Service within a short time after examination. One of the serious delays encountered by imported mer- chandise entering Guatemala occurs in its passage through customs. The principal factors responsible for this delay are: ( 1) inadequacy of physical facilities; (2) cumbersome pro- cedures; and (3) misuse of customs warehouse space, by pri- vate consignees, for ordinary storage. Shortage of Space Inadequacy of warehousing facilities for the receipt and examination of merchandise by the Customs Service is a grow- ing problem in both Guatemala City and Puerto Barrios. The system now in use results in congested storage at these points and causes the immobilization of large numbers of railway cars through lack of space into which to unload their cargoes. The latter, in turn, further increases congestion in port areas by curtailing the transport of freight away fro111 the piers. To provide relief in Guatemala City new customs ware- houses are already under construction. Such slow progress has been made on them, however, that improvement will be long in arriving unless specific action is taken to expedite this project. In an effort to release its cars-constantly tied up in customs yards by lack of space to receive unloaded cargo or by shortage of customs personnel to examine and release cargoes without unloading-the Railway Company is con- structing warehouse space to be rented to the Government for customs use pending completion of the Government's own warehouses. This will help, but permanent relief can be sup- plied only by the early completion of the new customs ware- houses themselves. At Puerto Barrios there is at present barely enough space for day-to-day customs operations. If imports increase or more work is thrown on that office as the result of decentralization 148 THE ECONOMIC DEVELOPMENT OF GUATEMALA as recommended below, added warehouse capacity will be essential. This, however, will not be required during the first year of operation under the program recommended here and one additional warehouse in Puerto Barrios should suffice for some years to come. Slow Procedures A second factor causing delay in the customs is the system used in the examination, processing, and release of merchan- dise to consignees. The Customs Service has recently effected a degree of improvement both in warehousing methods and in examination and processing procedures. The former now ap- pears reasonably well handled, to the extent that the cramped space will allow. Procedures, however, still appear cumber- some and unnecessarily slow. Because of the complicated, interwoven relationships of customs with other governmental activities and with the pub- lic, a helpful approach to more efficient procedures would be to obtain advice from the Customs Service of some other gov- ernment which has already devised a faster, simpler system of handling heavy volumes of imports and exports. Canada or the United States are suggested as possibilities for this purpose. An aspect which should be included in any study of this problem is the possible advantage of a reorganization of the entire Service. Examination of present customs procedures indicates an overcentralization of activity and personnel in Guatemala City. While there may be valid, if somewhat ob- scure, reasons for a failure to decentralize customs operations more definitely to the ports, it would appear that such action will sooner or later be required. Misuse of Warehouses A third reason for slow movement of merchandise through customs is the frequent practice of waiving accumulated stor- age fees on merchandise which has been left in customs custody for a period in excess of the legal free storage time. On these occasions the owner is excused from payment of the debt if he removes his goods without further delay. The procedure, offi- cially sanctioned from time to time, is undoubtedly intended TRANSPORTATION 149 to relieve congestion in customs warehouses; but such a solu- tion is a temporary one which is bound to react adversely in the long run. Merchants without warehouses and those whose warehouses are overcrowded are encouraged by this periodic waiver of storage fees to utilize the customs as a place of free storage. Thus in the end congestion is increased instead of reduced. In order to induce prompt removal of goods from customs, the Mission recommends the enactment of laws imposing charges for excess storage periods, fines for failure to remove on due notice, and confiscation and public sale of the goods after a reasonable elapsed period of grace. This would either reduce delays and congestion or increase customs revenue, or both. Cost of Reorganization Cost of a project to revise the Customs Service cannot be estimated accurately until the recommended study of organi- zation and procedures has been made. It should be relatively modest, however, and should in no event exceed ~250,000, in- cluding a warehouse at Puerto Barrios. The costs of changes in administrative procedures should be more than offset after the first year by savings resulting from them. Recommendation No. 33: Plan to reduce, after the first few years of the devel- opment program, the heavy ta'X burden which now hinders motor vehicle and air transport. Motor-vehicle operating costs are currently far too high to permit the development of profitable road transport at reasonable rates. This situation will continue to exist until the basic cause, poor highways, is corrected. Yet the public will not benefit fully from improved high- ways unless commercial motor vehicles use the highways in appreciable numbers. All artificial barriers now impeding the development of commercial and farm-type motor-vehicle transport should therefore be examined, with a view to re- ducing their harmful effects as early as may be feasible. •  150 THE ECONOMIC DEVELOPMENT OF GUATEMALA One ·of the most powerful deterrents to the importation and use of motor vehicles today is taxation. Guatemala im- poses a tax of 22 cents (00.22) per gallon on motor vehicle and aviation gasoline sold for nongovernmental consumption. For all practical purposes this doubles the cost of motor fuei to the private user. Import duties on a vehide vary from 12 percent to 24 percent ad valorem. To this must be added the consular fee, circulation tax, municipal taxes, plate tax, brakes tax and sales tax. When the vehicle goes into opera- tion the gasoline tax appears; and as repair and maintenance requirements soon develop from travel over the rough roads, taxes on tires, spare parts and accessories climb aboard the already heavily burdened vehicle. It has been estimated that the total cost of operation of a 10 ton truck is approximately 45 percent greater in Guatemala than in the United States. Continued preference for the .pack-animal and ox-cart is not surpnsmg. Admittedly, it may be premature to reduce many of these taxes at this time. The national benefit of such reductions cannot be fully realiz.ed until the highways are in better con- dition, yet clearly an immediate loss of tax revenue would tend to postpone their improvement. Eventually, however, duties and taxes on commercial vehicles and their accessories should be lowered, even if high rates are retained on pleasure vehicles. As early as practicable the tax on gasoline should be reduced by at least 50 percent. This should encourage wider use of trucks and gasoline in commercial hauling, so that the lowered tax rates would be offset by increased volume. Reduction of the gasoline tax will certainly become neces- sary upon completion of the Pan American Highway, if Guate- mala expects to attract tourist income through this artery. The present sharp contrast in retail gasoline prices between Mexico and Guatemala will discourage tourist travel across the frontier; for, however unsound it may be, the motorist's impression of the general price level of an area is dispropor- tionately influenced by what he must pay for motor fuel. • TRANSPORTATION 151 IV. Highways R ecommendation N o. 34: Adopt a basic national plan for development and maintenance of highways along the following lines: (a) Allot a larger percentage of government receipts to highways, with separate allocations for new con- struction and maintenance. (b) Concentrate funds at this time upon main highways serving important industrial and agricultural areas and centers of population, on a planned priority basis. (c) Limit maintenance and construction by the national government to the arterial routes and main feeder roads, leaving responsibility for small feeder and access roads to municipalities or to private interests requiring them. Present Conditions Although the existing network of national and depart- mental roads totals over 5,500 kilometers, the Repul:Hic is still hamstrung by the inadequacy and high cost of highway transport. The explanation lies in the terrain, the type of con- struction, and the condition of the highways themselves. Most of Guatemala's highways are highways in name only. With the exception of the Pan American Highway and a few kilometers of good pavement in the vicinity of Guatemala City there is no first-class highway in the Republic. Even National Route No. 3, leading from Guatemala City to San Jose on the south coast, is second-grade; its pavement consists of mixed-in-place asphalt and sand w ith a thin surface of stone-chips and asphalt emulsion. The Pan American Highway is being butilt to a heavy- duty paving specification which requires a crushed rock base compacted to six inches with a two-inch bituminous surface, all on proper subgrade and foundation. The majority of high- ways, however, are narrow one-lane roads of sharp curves and steep grades, surfaced with graded sand-ash; gravel or earth. Few are located according to good engineering principles and 152 THE ECONOMIC DEVELOPMENT OF GUATEMALA most appear to have been developed from farm roads or from the pack trails of earlier days, leading from farm to farm or from town to town. These roads can accommodate ox-carts, pack trains, and human carriers in rural areas but they are totally unsuited for modern traffic. Motor vehicles operating over such bad roads are subjected to heavy operating costs through excessive wear and tea·r, lost time, slow movement and less-than-capacity loads. Un- certain passability in the rainy season and clouds of dust in dry seasons add to the dangers of operation and the dis- comfort of drivers, passengers and wayfarers. Present conditions are attributable in part to improper design of drainage works ( ditches, culverts and bridges) and in part to the physical characteristics of the terrain. Heavy rainfalls late in 1949 caused a great deal of damage, much of which is still unrepaired. Inadequate funds and lack of both mechanical equipment and skilled personnel complete the gloomy highway picture. Funds All highway construction and maintenance, except that within urban (municipal) limits, is a responsibility of the Minister of Communications and Public Works and is under the supervision of the Director General of Highways. This work is decentralized to various subordinates on both an area and a functional basis. The distinction between national and departmental routes is one of location, purpose and use rather than of type of construction or responsibility for construction and maintenance. Cost of all public highway work is borne by the national government, except on the Pan American Highway where the United States contributes two-thirds of the funds. Highway appropriations for the fiscal year 1949-50 originally amounted to a total of ~4,117,296. With the addition of some ~515,000 for specific purposes including repair of storm damage, and the deduction of some ~600,000 transferred out of highway appropriation for various purposes including other public works and certain "confidential" expenses of the Government, TRANSPORTATION 153 the net highway budget as of December 31, 1949, was approxi- mately @4,032,000. This amounted to about eight percent of the total national budget and appears to have been hardly sufficient for proper maintenance and restoration of existing roads alone. The 1950-51 highway budget was even smaller at @3,550,000. A recent action allocating an estimated @1,430,000 from coffee tax receipts will improve conditions, but larger and more permanent increases in highway funds are essential if .any real progress is to be made in new con- struction or improved maintenance. Of t,he original 1949-50 highway budget, some @225,000 was required for salaries of permanent employees; about @2,100,000 was allotted for scattered items of new construction and for fees and other costs attendant upon new construction; the balance of about @1,800,000 had to cover all maintenance activities including shops and the Chiquimulilla Canal as well as the highway system. To spread this last sum over the total road system of the Republic would provide less than @325 per kilometer per year for maintenance. The same general proportions of distribution were followed in the 1950-51 budget. The ratio of maintenance funds to road-miles to be maintained indicates clearly why some roads were left ungraded and why many culverts, bridges and their structures remain unrepaired. The amount devoted to new construction, compared with the @33 million conservatively estimated by the Director General of Highways as needed to provide a minimum good highway system, shows the small annual progress being made toward completion of require- ments in new construction or major improvement. The need for greater highway funds is so urgent that the Mission feels that steps to provide them should be taken at once. The present condition of the highway system is one of the greatest handicaps to the economic advancement of Guatemala and its improvement justifie!! a larger percentage of the national budget. Not only is new construction neces- sary but the Government must at the earliest possible date establish a policy of properly, maintaining the key roads. Prompt repair of damages is essential on all highways. A 154 THE ECONOMIC DEVELOPMENT OF GUATEMALA small break in the best pavement quickly becomes a major damage if repairs are not made immediately. Roads of a lower class deteriorate rapidly if maintenance is not con- tinuous. These activities require adequate funds and constant attention. It is highly advisable, furthermore, to make separate appro- priations for new construction and for maintenance. Ex- perience has often shown that when funds for both are lumped together, the daily drain of one may very · well vitiate the other. This, indeed, appears to have happened in Guatemala. Part of the deficit in the highway budget can be met by abandoning national maintenance work on roads of purely local character. Small feeder roads, mine roads, farm roads and other roads of local value only should be removed from the national maintenance budget wherever possible and left to the local municipal governments or to the private interests requiring them. While this policy may appear harsh, it seems to be the only feasible method of allocating sufficient funds to the maintenance of intercity and interarea highways carrying substantial traffic. Another part of the present deficiency can be met by annual appropriation of funds made available through the elimination of nonessential projects in other fields. To reduce the effects of political pressure on the selection of projects to be eliminated or roads to be dropped from the national maintenance portfolio, these may be selected by the Committee on Economic Policy recommended elsewhere in this report. in consultation with the Director General of Highways as Technical Advisor. If this is done, the Highway Department can plan and carry out its new construction and its mainte- nance work effectively and be held to account for its per- formance. Planning a Basic Highway Pattern Development of a basic national highway network involves, first, a program of construction or improvement and, second, preservation through effective maintenance. Faced with the high cost of road construction and a low total national budget. TRANSPORT AT ION 155 Guatemala should establish a balance between the value of serving areas now requiring service and the value of serving potentially rich areas not now producing enough to war.rant a road on the basis of current output. The choice may some- times be difficult. As a matter of broad policy, it would appear that first relief should be given to areas already producing valuable commodities in considerable volume. Reduction of costs to shippers through competition between motor-truck and other carriers should also be considered. Priority should be given to those highways connecting large centers of production, marketing, distribution and consumption, and principal ports of import and export. Where such highways do not exist they should be built; where they exist but are so located from the engineering standpoint that substantial improvement or main- tenance of the existing route would be unduly expensive, they should be relocated. When these highways come into use, the maintenance of closely paralleling low-grade highways and local roads com- peting with these major highways should be abandoned in favor of concentrating funds on proper maintenance of the good network. Access to the various farms, mines and small towns off this network should be provided by local sources to the greatest extent possible. Any exceptions should be limited to short feeder roads of the lowest possible class that can carry the traffic and still be maintained at a reasonable annual rate. Some improvement will doubtless be warranted in certain cases in order to reduce annual maintenance costs or because of changing traffic demands. A Proposed Network On the basis of the above policies, several areas in the Republic have much greater justification than others for a high priority in a broad plan for improving the transport of com- modities. Outst~nding among these are the south coastal areas, the western highland regions, and the capital area. Access to the seaboard is equally essential for foreign trade purposes. If the terrain were level, two intersecting major 156 THE ECONOMIC DEVELOPMENT OF GUATEM~A highways might serve very well in an area the size of Guate- mala; but the actual geographic and topographic conditions of the country as well as the location of more important areas of population preclude such a simple solution. For domestic movement between production and market centers, all current needs can probably be met adequately by two major highways tunning in a general east-west direc- tion--one in the highlands and one on the south coast. These should be connected by two lateral (north-south) roads one in the eastern and one in the western part of the Republic. From the standpoint of access to the sea, one highway to the Pacific coast and one major highway to the Atlantic coast should suffice initially; but a second highway, probably re- quiring improvement to major classification at a later date, would give added access to the Atlantic from areas not readily served by the major highway. Present traffic does not appear to justify any other major highways. As an inducement, however, to the development of potential resources in the central-northern and northwestern areas it would appear wise to provide another east-west road along a northern valley, and also a road to connect the Peten and northern Quiche with the rest of the Republic. The Mission is of the opinion that a basic network sh,)Uld consist of the major highways outlined below (see also accom- panying map). It may be mentioned that a highway program received in November 1950 from the Ministry of Communica- tions is generally similar to the network recommended here, although differing in some details. Reasons for the Mission's selections and the order of priority in which they should be arranged are discussed later in this chapter. Major Highways Proposed A. East-West (1) A piedmont ·highway from Chiquimula to Puente Talisman via Escuintla and Coatepeque, generally following the portions of National Routes 6-E, 6-W, 13 and 1 in those. areas.  Map IV . i-····· Recommended Basic • .; .•.i Highway Net work ~ ' - -- i EXISTING CONNECTING LINK .... ~ .·i OR HIGHWAYS RECOMMENDED PRIMARY, t · ++·+·+·+·-t · +· +· +·+ ·+·+ ·+· +·+· +· +·+·+·+·+·+·+·+- · + ·+·+·++ • r . • ······" PAVED SURFACE + +· RECOMMENDED SECONDARY, t t GRAVEL SURFACE • . + + 0 HIGHWAY NUMBER SYMBOL t + +·+·+·+++·+·+ INTERNATIONAL LIMIT ~ + + . - ·- ·- ·- ·- ·- DEPARTMENTAL LIMIT ~ t +•·+·+-·+· ... ·+· +·+ ! •.,., ~~ . ~ aTI-L + .;. + + . ... ' 11,, ~ ·+·~ -li:;E! . nr•• . LANI ,LHH ITI.A + + . . .....,. PETEN ...., .j. ......'>t ~'.\" ., ~ .... .;. .j. \• -t,~ o,.,, t . . ~ + M E X C 0 ~~ ...,. ·•:. ~ '-"""" I .t .;. . •.... ·~ ,- t t . ~ + ' ·• ·• ·+ ·+·• ·•·+· + · +·+·r·•·• ·+·+ ·+·• ·• ·+-•'+-- . • ' ~,· +.j. · {.., i .r·.._. ...J . J - ·- • - . ...... . ., \ .j. J ~ 0 ,j i . j (' ,· ' """ °'· ·., ""' ·-·1 ·-.11 c•tNAI r ·~·....... .r . l .r· ,.,. / .' I HUEHUETENANGO (' .:!. · -·~ i / ... ............ . . L, ALTA VERAPAZ / _j... / i / :,: IZABAL \ ' ........ ... ' ~ IL ..... j ·" ,t" ' EL QUICHI:: ., COl&N \ ·- ·~ o~-· · =~ ,,../' ... LOI AMAT~· · · " \ ... •·"' ',..... ... . .,. ....... _. • ZACAM , ·- · /'"":. ;.JC / ... ',. \ • CHIIIIMULA • •• . HONDURAS \ CHIQUIMULA .,.... t . ,; ,. . PACIFIC ,.··· ........... OCEAN t··· E L SALVADOR + ···•·" TRANSPORTATION 157 (2) The Pan American (Franklin Delano Roosevelt) Highway between the Mexican and the Salvadorean frontiers via Guatemala City. B. North-South (1) Guatemala City to Escuintla (part of National Route 3) and Guatemala City to the Zacapa-Chiquimula area (part of National Route 4). (2) A connection through Quezaltenango between the Pan American Highway and the south coast highway (parts of National Routes 9-S and 1). (3) From Guatemala City to the Cohan area replacing the present National Route 5. C. Exits to the Ocean (1) To the Atlantic: (a) From Guatemala City to Puerto Barrios, along the general line of National Route 4, extended and partially relocated . . (b) From Co ban to Lake Izabal, along the general line of Route 7-E, connecting southward with the Guatemala City-Puerto Barrios highway. (2) To the Pacific: From Escuintla to San Jose (part of National Route 3). D . Aids to Development (1) From Huehuetenango east to Cohan, along the gen- eral line of Route 7-W, relocated in its eastern part. (2) From the north end of Route 7-E to join the existing road in the southeast corner of the Peten. 158 THE ECONOMIC DEVELOPMENT OF GUATEMALA Supplementary Roads of Importance Other roads of significance in the national economic pic- ture are those tapping important industrial areas or serving as a means of access to mining, agricultural, grazing or other productive regions. While not considered as important indi- vidually as those of the basic highway network, these roads should be kept under consideration for improvement as funds become available. Priorities within this group will, of course, depend upon the relative importance of respective regions at the time funds become available. Since improvements on these roads will probably be de- ferred for some time because of the pressure of higher priority projects and since conditions in any of these areas may change materially during this period, no attempt is made in this re- port to recommend priorities in their construction. Such roads include: a. Route 16 between Chiquimulila and Cuilapa and Route 6-E between Chiquimulila and the border with El Sal- vador. b. Route 19 between Sanarate, Jalapa, and Progreso. c. Route 18 between Jalapa and Quezaltepeque. d. Route 20 between Quezaltepeque and National Route 4 • via Zacapa. e. Route 5 between Cohan and Sebal (with possible exten- sion further into Alta Verapaz). f. Route 9N between Chiantla and Santa Cruz Barillas. g. Route 10 between San Lucas and Antigua. h. Route 11 between Patulul and San Antonio Palopo and National Route 1. 1. Route 6W between Ayutla and Coatepeque. j. Route 8 between Malacatan and Ayutla. k. Route 15 between Sacapulas and Encuentros via Chichi- castenango. 1. Route 1 between Encuantros and Patzicia via Panaja- chel. T R.\ NSPORTATION 159 m. Route 1 between Quezaltenango and San Marcos ( La Union) . n . A new route skirting the south and east shores of Lake Izabal connecting National Route 7-E in the vicinity of Panz6s with Puerto Barrios. General Specifications for Construction In recommending types of highways needed the Mission has considered the prevailing soils, available materials, costs, pres- ent and probable future traffic, and also the kinds of pavement already installed in some areas. Very heavy motor trucks of the type common in the more developed countries are not found in Guatemala. While the use of larger trucks may follow the paving of more highways, it appears probable that the mountainous terrain and unavoid- ably steep grades will tend to discourage rapid increase in this type of traffic. Pavements on most highways, therefore, may safely have somewhat less strength than is required in areas where heavy trucks are common . • A similar situation obtains in connection with road gradi- ents. Specifications for' flat grades increase cost heavily be- cause of the additional rock and earth movement required and the extra road distances sometimes involved. In the interest of lowering cost and in view of the improbability of much heavy truck traffic, therefore, it might be best to allow steeper grades on most highways in Guatemala than the seven percent maximum ordinarily used in first-class highway construction. One of the highways recommended, that from Guatemala City to Puerto Barrios, will probably be required to carry a heavier volume of commercial truck traffic than the others. CotJsequently it should be a first-class highway in all respects except for gradient. The specifications of the Pan American Highway should be used, modified in mountainous 'country to permit grades up to about nine percent compensated for curva- ture, and reduced to a maximum of seven percent in rolling country. This modified specification is intended wherever a "first-class" highway is recommended in this report. Some 160 THE ECONOMIC DEVELOPMENT OF GUATEMALA savings in costs for excavation can also be accomplished by authorizing steeper slopes (approaching the vertical) for side- walls in cuts where local experience indicates there is adequate stability to prevent landslides. International agreements on the Pan American Highway require its completion to the same specifications now being applied. On the other hand, pavement and other specifications on all highways connecting with the paved portions of National Routes 3 and 6 are, to all practical purposes, controlled by those previously adopted on these routes. These roads are of less than first-class quality, but they will carry the traffic which may be expected to use them provided they are given proper and prompt maintenance. Because of the existence of this latter type pavement in the present road network and considering the prevalence of the volcanic sand-ash material in the soil as described elsewhere in this chapter, it is suggested that all paved roads except the Pan American Highway and the Guatemala City-Puerto Barrios Highway could be constructed with the same type of pavement used on National Route 3. Three or four in~hes of crushed stone or good gravel should, however, be incorporated in the base in all areas of soft foundation. Gradient limits, side-wall slopes, etc., should be the same as those for the Puerto Barrios Highway. This specification is intended wher- ever a "second-class" highway is recommended in the present report. Where roads are constructed for temporary use or for very light and infrequent traffic, they should be "third-class" roads. For these purposes a graded, single-lane gravel-surfaced road will serve. It should be constructed with good drainage facili- ties and with traffic "passing points" at frequent -intervals, and its curves and gradients should be held within moderate limits. As has been mentioned, lack of proper drainage has caused most of Guatemala's road damage. The only remedy is to increase the capacity and number of culverts, to improve the road-ditches to carry a heavier flow and permit more frequent TRANSPORTATION 161 discharge, and to design bridges to withstand higher flood waters. Paving of drainage ditches is, in general, too costly to be warranted, although paving of short stretches in par- ticular cases may be desirable. In the event that shortage of funds prevents complete con- struction of a highway at one time, it would be advisable to construct all bridges and drainage structures to full project width and strength, and to full flow capacity, even though paving is omitted or road width reduced. This will eliminate the need for major reconstruction when the final portion of the work is undertaken and will reduce damage in the mean- time. Cost Estimates In order to establish a program to develop the recom- mended highways, some rough estimates of the probable cost of construction or major improvement are necessary. As stated earlier, detailed surveys have not been made and com- plete estimates of cost are therefore not available. The known costs of some existing highways can be used as a general guide for comparative purposes after adjustments have been made for differences in terrain, materials and field conditions. Loca- tions can be assumed from map-studies. Distances can be approximated from data in the Guia Kilometric<r-or better, from map measurements. In all cases except the · Pan Ameri- can Highway, however, some necessary relocations will change the final distances. It cannot be emphasized too strongly that estimates based on such data represent only an approximation of final costs. It should be pointed out' also that current rises in wage scales and in the cost of materials will result in increased costs of all types of work. Ultimate revisions of estimates are there- fore more likely to be upward than downward. With these reservations, then, the Mission estimates that the cost of the total highway improvement program described here would be approximat~ly SO million quetzales, divided as shown in Table XX. 162 THE ECONOMIC DEVELOPMENT OF GUATEMALA TABLE XX ESTIMATED COSTS OF PROPOSED HIGHWAY DEVELOPMENT PROGRAM (in millions) Guatemala City-Puerto Barrios (first-class). .......... <.2)17.0 Pan American (first-class) (Guatemalan cost, ex- cluding United States share) .. .................................. 9.0 South coast road (second-class) ...... ..... ... .................... 11.5 Cohan-Lake Izabal (second-class) (plus a link south to new Puerto Barrios~Guatemala City road). ....... 7.0 Cross road through Quezaltenango (second-class) .... 2.5 Huehuetenango-Coban {third-class) (development road) .................. ... .. ...... ..... ....... ... ...... .... .. ...... ..... ...... ....... 2.0 Peten connection {third-class) {development road) .. 1.5 Total cost ...... ............. ... ..... ... .... ... .. ........ . <.2)50.5 Except for the Pan American Highway, each of the above projects must be preceded by a detailed engineering location survey and by the preparation of detailed plans and specifica- tions. This phase requires several months in each case and allowance for this time must be made in scheduling a pro- gram. Accordingly, these studies should be initiated promptly and carried out in sequence as rapidly as the availability of personnel will permit. Recommendation No. 35: Complete National Route 4 as a pav~d, heavy duty highway between Guatemala . City and Puerto Barrios, possibly relocating the portion below El Rancho to follow along the valleys of Rio Grande o Motagua and Rio de las Vacas. (Probable cost: about ~17 million) Route 4, connecting the capital area with the only seaport of the Republic capable of carrying a large volume of com- merce, is potentially the most important single highway in Guatemala. This route will supplement the capacity of the railway between these two areas, providing an alternate life- line if the operation of the railway should be interrupted and supplying a competitive means of moving goods which might well result in a lowering of rail rates.  • TRANSPORTATION 163 For financial reasons initial work on this route may have to be held to a lower standard than is desirable. However, because this highway can be expected to carry an increasing amount of commercial truck traffic, it should eventually be constructed as a first-class, heavy duty road of the type of the Franklin Delano Roosevelt Highway. Relocation of the southern section (between El Rancho and Guatemala City) to follow the general lines of the upper Motagua and Las Vacas Rivers would be less difficult and probably less expen- sive than improvement of the existing southern portion of National Route 4, and would also facilitate future connection between Guatemala City, Salama, and the Cohan area. Recommendation No. 36: Complete the Pan American (Franklin Delano Roosevelt) Highway. (Probable cost to Guate- mala: about ~9 million) Completion of the Pan American Highway will serve multiple purposes: (1) it will open the western Huehue- tenango region and, to some extent, the Quiche area to de- velopment and trade; (2) it will open Guatemala to motor traffic from Mexico, the United States and Canada, with the attendant prospects of a significant tourist trade; (3) it will provide a good, paved motor road for the flow of cargo and passengers along the axis of the highlands from Quezal- tenango to the east; and ( 4) it will promote international com- merce with El Salvador and the other Central American re- publics to the south. Early completion of the western section, linking Guatemala and Mexico, is most important, especially since this action will utilize the financial aid now available from the United States for the project. Continuing delays might conceivably cause loss of that assistance. Recommendation No. 37: Provide a paved two-lane highway to connect Gua- temala City with the fertile regions of the south coast and the Department of San Marcos. (Prob- able cost: about ~11.5 million)  • 164 THE ECONOMIC DEVELOPMENT OF GUATEMALA (a) Complete the paving of National Route 3 from Guatemala City to Escuintla. (b) Improve and pave National Route 6-W from Escuintla to Coatepeque. (c) Improve and pave National Routes 13 and 1 from Coate- peque to Puente Talisman. A continuous paved highway from the Capital, via National Routes 3, 6-W, 13 and 1, through the rich south coastal areas to the Mexican border, will in effect join these productive zones more closely with their essential markets. Direct high- way transport of goods from the entire region will be possible, not only to Guatemala City, but thence to Puerto Barrios over Route 4' (see Recommendation No. 35). In addition, the Department of San Marcos will be given unobstructed access by motor truck to the railway. This road offers, for its territory, the same advantages and safeguards as were mentioned in the case of the Puerto Barrios Highway. Its improvement, moreover, will play an important role in the economic development of the south coast as dis- cussed in Chapter II. Recommendation No. 38: Make emergency repairs to National Route 7-E from Coban (Tactic) to El Estor and later provide a paved two-lane highway on this route with a con- nection to the relocated National Route 4. (Prob- able cost: 00.5 million for early repairs, plus 06.5 million for final paved highways) The Cohan area already contains a fair amount of agri- cultural activity and some small industries. Coffee, leather goods, lead ore and other exportable materials are produced. Reports indicate that additional lead, as well as zinc and silver mining industries, can be developed when cheaper transport becomes available. At the moment, however, this area is virtually isolated from the capital and from the railroad to Puerto Barrios. Its only practical outlets at present are by air, by a slow and TRANSPORTATION 165 inefficient combination of highway, railway, and water trans- port down the Polochic Valley, or by difficult and expensive motor haul over steep mountain grades to the capital or to the railway at El Rancho. The Polochic Valley and the Lake Izabal waterway (see Recommendation No. 48) form a natural outlet to the sea from the Cohan area and offer a shorter and better route to Puerto Barrios if properly developed. The least expensive method of providing this route is to improve the present low grade road (National Route 7-E) between the Cohan area and El Estor, on Lake Izabal, so that it can carry motor trucks of medium capacity in two-way traffic. Such a high- way should serve adequately all immediate requirements for cargo movement. It is understood that the Compaiiia Minera de Guatemala, now operating in the Cohan area, has expressed a willingness to contribute to the financing of this highway as an aid to the movement of its ore. Final paving of this route will have to be deferred in favor of more urgent work. Since a substantial amount of repair work is needed on the existing road to permit its use at an early date, it would be advisable to begin increasing its traffic- carrying capacity by emergency-type repairs and some im- provements. These should include repairs to culverts, bridges, drainage ditches and gravel surface and the provision of turn- outs for passage of vehicles. Widening of the highway and completion of the drainage system should follow, with paving to be added when funds are available. Ultimate connection of this road with the relocated portion of Route 4 would afford a motor route from Guatemala City to Lake Izabal and eventually to the Peten. A highway connecting the Panzos area with the Puerto Barrios area via the south and east shores of Lake Izabal has already been mentioned in this report as a desirable project for future consideration. While swampy terrain south of Lake Izabal and the numerous streams t<> be crossed in that area will make this an expensive project, it would provide still closer highway access to Puerto Barrios from both the Cohan and the Peten areas. 166 THE ECONOMIC DEVELOPMENT OF GUATEMALA Recommendation No. 39: Provide a paved two-lane highway connecting the Pan American (Franklin Delano Roosevelt) High- way with National Route 6-W near Retalhuleu, via Quezaltenango. (Probable cost: about @2.5 mil- lion) Widening and paving a relatively short stretch of existing road, from the Pan American Highway at a point near San Cristobal T. to Quezaltenango and southward to the piedmont highway (Route 6-W), will open Quezaltenango to the major highway and rail networks of the country. Thus Quezal- tenango and its tributary areas will have access to the seaports of both the Pacific and the Caribbean, as well as to the capital. At the same time this road will provide the western portion of Guatemala with a paved link between the south coastal areas and the western highlands, to replace the present rough and difficult routes. Recommendation No. 40: Provide a light-duty highway between Huehue- tenango and Cohan. (Probable cost: about @2 million) (a) Restore and improve National Route 7-W from Huehuetenango to Sacapulas. (b) Relocate National Route 7-W from Sacapulas to the Coban area, generally fallowing the valley of Rio Negro o Chixoy. A passable all-weather road, capable of carrying a mod- erate volume of light motor traffic in this area, would help the rural population and the national development in general. National Route 7-W already exists but is blocked to through traffic in numerous places because of flood damage to bridges and the highway itself. Between Huehue-tenango and Sacapulas the highway re- quires only restoration of a few bridges and a moderate amount of grading, ditching and surfacing to put it in a con- dition satisfactory for the traffic expected in the immediate TRANSPORTATION 167 future . But from Sacapulas to the Cohan area the location of the existing road is generally unsatisfactory and even dan- gerous. It appears that restoration and improvement of the present road would be both difficult and expensive. Prelimi- nary reconnaissance indicates that a more satisfactory route may be found in the valley of the Rio Negro o Chixoy. The small amount of export traffic currently originating in the I:Iuehuetenango area and the limited flow of domestic commerce between this and the Cohan area, do not at present justify a highway of great capacity. In view of the probable future development of mineral deposits in those areas, how- ever, plans for this highway should provide for future w iden- ing and other improvements. Recommendation No. 41: Construct a light-duty road between El Estor and Cadenas, Petco. (Probable cost: about ~1.5 mil- lion) A second development road that is considered desirable at thi s time would connect El Estor and the Peten, via the Cadenas terminu s of the present Poptun-Cadenas highway. Within the Guatemalan Republic the only surface route by which traffic may now move from the Peten through Cade- nas is via the Sarstun River. This route, which is discussed at greater length elsewhere in this chapter, is not considered suitable for development. The natural route of commerce from the Peten to the Caribbean Sea is through Balice, using the ports of Belice, Stann Creek, and perhaps Punta Gorda. From a strictly technical point of view it would seem desirable to facilitate this flow if possible. Yet an internal road connec- tio_n is needed for domestic movement of goods. A practicable highway route through the Sierra de Santa Cruz appears to lie along the general line of the valleys of the Rio Sauce and Rio Chiruchipec, or the Rio Choc6n. Such a road, joining Cadenas with El Estor, would provide highway- water connection with Puerto Barrios and direct highway connection with the rest of the Republic. 168 THE ECONOMIC DEVELOPMENT OF GUATEMALA A one-lane, gravel-surfaced highway, capable of carrying only light motor traffic, should serve all the needs of the Peten for the present and the near future. Many Guatemalans believe that the resources of the Peten are sufficient to war- rant the immediate expenditure of greater sums for its de- velopment. It should be noted, however, that active explora- tion for petroleum in the region has stopped and that no other new commercial development operations of consequence appear to be in progress or in immediate prospect. Chicle is being successfully transported by air. Logs are being moved by river flotation. The population of the Peten is small and scattered. Even if colonization attempts now in progress are successful, the over-all effect on development of the Peten will be small for a considerable period of time. At present, therefore, there does not appear to be sufficient prospective traffic to justify constructing the El Estor-Cadenas road for more than exploratory purposes. V. Railways Rerommendation No. 42: Place railway freight and passenger rates, together with those of other common carriers, under the jurisdiction of the proposed Public Utilities Com- mission. (See Recommendations Nos. 30 and 31.) Existing Railway Network The main lines of the International Railways of Central America, the principal freight carrier in the Republic, extend from Puerto Barrios on the Atlantic coast to Guatemala City (197 miles) and from Guatemala City via Escuintla and Santa Maria to Ayutla on the Mexican border (178 miles). An im- portant branch carries traffic from Zacapa to Anguiatu (70 miles) on the Salvadorean border and thence into El Salvador; another from Santa Maria serves the port of San Jose on the Pacific coast. Smaller branches connect the main line with the lesser Pacific ports of Champerico and Ocos and with the  Map V ,-·-·-·-·-·-·-·-·-·-·-·-·-·-·: I I ~-:..-·-·-·j .-. I "\. I ' \.r. I Railways MEXICO ' ........ ·, I ~,·,....... I ""\ I I 1 JA" IIJAJI I t . .., I ~ POl'r~H ; I -t-+- RAILWAYS ·-·-·-·-·- ·-·-·-·-·-·j ) CHINMA q \ \ ',, ll CAOIN .. I ........ llrllll.y,,., 1.mtit•STOIIIQ I. INTERNATIONAL RAILWAYS OF CENTRAL AMERICA 2 . NATIONAL RAILWAYS OF MEXICO 3. UNITED FRUIT COMPANY BANANA LINES 4. COMPANIA AGRICOLA DE GUATEMALA 5. VERAPAZ RAILWAY HONDURAS - - PRINCIPAL HIGHWAYS J. PORTS INTERNATIONAL BOUNDARIES . ...... " · '-.. '-o. "-,.,. L. tL SALVADOR PACIFIC OCEAN .... TRANSPORTATION 169 inland towns of San Felipe and San Antonio on the south slopes of the mountains near Mazatenango. Except for a short, government-owned line in the Polochic Valley (see Recommendation No. 45) the other railways in Guatemala are private systems of the United Fruit Company. These include the lines of the Compaiiia Agricola de Guatemala on the Pacific coast and the United Fruit Company Railways on the Atlantic side. Operating within the United Fruit Company areas and hauling ~ompany cargo, they are not strictly public carriers. They connect with the main lines of IRCA, however, and use interchangeable equipment. Sched- uled trains are operated by the IRCA over the tracks of these private systems, affording freight and.passenger services to all points. Agreements between IRCA and the United Fruit Company subsidiary, such as that of November 4, 1936, have provided IRCA with additional cars, locomotives and operating cash in exchange for stock, 20-year notes and protective arrange- ments against the use of competing port concessions. Capacity Both IRCA and the United Fruit Company railroads have acquired a substantial amount of rolling stock of all classes in the past two or three years including a number of steam locomotives and additional flat cars, box cars and banana cars. All of these have improved operations. The capacity of IRCA is limited by the fact that it is a single track line and that it operates over very difficult terrain. The movement of all trains is slowed by the necessity for meeting and passing trains at sidings only. Moreover, as density of traffic rises it also increases ,the cost of operation because of the greater number of passings required, each involving a loss of time and fuel consumed in stopping, wait- ing and starting. The need is also increased for the intricate and careful dispatching necessary for hauling heavy two-way traffic on a single track. 170 THE ECONOMIC DEVELOPMENT OF GUATEMALA Steep ruling grades prevent the use of heavy trains with present motive power. The use of more powerful locomotives would help and six large new diesel-electric engines have been acquired. The terms demanded by the Railway Union for their operation long proved unacceptable to the manage- ment of IRCA, and the locomotives were kept out of service pending a mutually aceptable solution to this problem. It is the opinion of the Mission that the railway is nearing the point of saturation in its traffic and that future demands for rail freight movement !an be met satisfactorily only through the use of equipment of greater capacity or by double-tracking. Double-tracking the line would be far too expensive (averaging around ~100,000' to ~150,000 per mile) to be justified by any prospective increases in cargo-haul. It is, therefore, gratifying to learn that the dispute concern- ing the use of heavier diesel locomotives has been resolved. Railway Labor IRCA is one of the largest employers in Guatemala, with a total regular employment of 5,900 persons and a pay roll of some ~5,850,000 annually. By law at least 90 percent of the employees must be Guatemalans and at least 85 percent of the pay roll must go to Guatemalan workers. The rail:way union is the most powerful organized labor group in the Republic. Partly as a result of the activities of this union and partly as a result of various wage and labor laws, wages of employees of the IRC A have ri sen during the past six to ten yers by from 25 to 200 percent. Social security payments by the railway amount to 0180,000 per year; seventh-day pay, holiday pay, vacation pay, and sick pay add another 0210,000 per annum; medical service costs 070,000 per year and pensions (voluntary) 050,000. In addition, many employees receive free quarters, water, light and transporta- tion for members of their families. All of these social benefits have had a profound effect upon railway operating costs and must be taken into account in examining the present rates to shippers. TRANSPORTATION 171 Passenger Rates Ordinary passenger service on the IRCA is div«ied into first and second classes. First class cars are carried on certain trains on the main line and the San Jose branch, generally once daily each way. Second class service is more frequent- usually several times daily each way-and is available on the trains carrying first class passengers as well as on mixed trains on all parts of the system. Special "tourist cars" ( the equivalent of parlor cars) are operated only for steamship tour groups whose itinerary includes Guatemala City. It should be noted that journeys over the IRCA are rela- tively short; in 1949, for exan1t,le, the average revenue per passenger was {?J0.37. Passenger-carrying trains stop at each village that is larger than a cluster of huts. This type of ser- vice is very expensive to a railroad and not very remunerative. It can be financed only by charging high passenger rates or by absorbing passenger service losses in the charges for freight movements. A schedule of maximum rates, established in the original contracts between the government and IRCA's predecessor railway companies, apparently is still in force. It may be presumed, however, that the existing passenger rates reflect the maximum which can be charged by the company without further negotiations with the Government. Present rates for passengers average {?J0.015 per mile for second class passage and {?J0.03 per mile for first class passage. Eighty-four percent of all passengers travel second class. Freight Rates Analysis of freight rates and costs is more difficult than for passenger rates. In addition to the variation in local costs of operation, freight charges must depend upon the individual commodities and must take into account such factors as weight and size of items, average distance hauled, perishability, dangers in handling various types of cargo, value and lia- bility for loss, and in some cases the cost of tying up cars until they can be unloaded. Average rates per ton-mile on the IRCA are quoted at {?J0.073 for local freight and from {?J0.046 \o {?J0.050 for all 172 THE ECONOMIC DEVELOPMENT OF GUATEMALA freight handled. Although direct comparisons are seldom valid in• matters of this kind, inspection shows that these average rates exceed those of many other countries. It is quite possible that they are higher than they should be. A comparison of the factors affecting costs of operation of the IRCA and a typical railroad in the United States, for example, would indicate that IRCA rates should be the lower of the two. Wages are substantially higher in the United States and the railroads there are subject to heavy taxes. Legal requirements for safety measures and for service impose added costs that do not nqw prevail by law in Guatemala. Further, winter condition ~crease operating costs in the colder United States areas. Four basic causes may be responsible for the higher ton- mile rates in Guatemala. These are : (I) the absence of effect- ive competition in freight movement as compared to the keen competition between trucks, waterways and railways of the United States; (2) the lack of any governmental control over IRCA rates, in contrast to the regulatory powers over inter- state rail rates vested in the Interstate Commerce Commission in the United States; (3) the short hauls and heavy grades, whose high costs are not sufficiently balanced by the more economical longer hauls on the level or on lighter grades enjoyed by most railroads in the United States; and ( 4) the necessity for importing practically all equipment and supplies, paying transportation and handling charges which increase both investment and operating costs. It is the conclusion of the Mission that competitive freight hauling, which would of necessity operate over the same gene- ral grade and haul conditions as !RCA (see Recommendation No. 35) should be introduced as one practical means of testing whether rail rates are in fact so high that they would exceed for heavy, long-distance freight movements the normally higher rates of road transport. In this case it might cause a voluntary adjustment to a more equitable level. ' Impartial Rate Regulation Elsewhere the Mission has recommended the creation of a nonpolitical Public Utilities Commission for the purpose of TRANSPORTATION 173 adjudicating rates and services of common carriers and other similar utilities serving the public. A renegotiation of existing IRCA agreements with the Government is also recommended, in part to permit the jurisdiction of the Public Utilities Com- mission to encompass the railway. Such a Commission could examine the allegations, fre- quently heard in Guatemala, to the effect that IRCA maintains rail rates to the public at an unnecessarily high level in order to offset a lower set of rates accorded to one of its principal users and stockholders. It is not within the province of the Mission to enter into that controversy, except to suggest a means of determining the facts and of making adjustments if any prove to be necessary in the public interest. Equally, it should be the responsibility of the proposed Commission to insure that the utilities concerned are permitted to earn enough to cover the proper operation and maintenance of their plant and equipment, to permit compliance with legal requirements and union contracts as to labor and other operat- ing conditions, and to pay a reasonable return on their investments. Recommendation No. 43: Avoid nationalization of the IRCA. It has come to the attention of the Mission that in some Guatemalan circles there is talk of nationalizing the Inter- national Railways of Central America. While there has not yet been any official consideration of such a step so far as the Mission is aware, it seems appropriate to discuss the sub- ject briefly because of its economic importance. The underlying reason for this proposal appears to be discontent with the high level of ton-mile freight rates charged by the IRCA and the common belief that the United Fruit Company is given preferential service. Slow service has been charged also, but otherwise the Mission has heard no serious complaint against the efficiency of actual operations of the railway. 174 THE ECONOMIC DEVELOPMENT OF GUATEMALA It has been suggested that government ownership of IRCA might benefit the public by lowering freight rates and by eliminating the discriminatory practices alleged to exist. With respect to rates, at least, such benefit is extremely prob- lematical, since under government ownership the rates would have to be maintained at a level sufficiently high to pay the cost of operating and maintaining the railway, as well as the costs of its acquistion, particularly since the Government would be expected to be a model employer. A much less expensive and less hazardous method of ac- complishing the same benefits would be through regulation by the Public Utilities Commission recommended above. The introduction of competition in freight hauling, through high- way construction and the provision of more pier facilities, would likewise tend to insure proper rate levels, faster service to ships and prompt handling of merchandise. Both methods would be more certain in their effects than would nationaliza- tion of the railway system and would save the Government the financial burden of acquiring and operating the railway. It is the opinion of the Mission, therefore, that nationaliza- tion of IRCA at this time would be inadvisable. Such action prior to the termination of the present contras:t period would, as a matter of simple justice and recognized principles of law, require that the present owners (stockholders) be com- pensated for their loss at a fair .,-aluation of the property thus expropriated. At a time when so many urgently needed projects remain uncompleted and in need of government financing the Republic cannot afford to devote a large propor- tion of its resources to such purposes. Recommendation No. 44: Reject proposals for electrification of the IRCA. In connection with discussions about nationalization of IRCA the desirability of electrification is frequently mentioned. From an examination of the facts and especially in view of the heavy outlay of funds which would be required, the Mission feels that this proposal is unsound with or without nationalization. TRANSPORTATION 175 Among the reasons which have been advanced for elec- trification are: (1) that · IRCA would then utilize one of Guatemala's undeveloped natural resources (its water power); (2) that the use of imported fuel would be eliminated; (3) that electrification would increase the capacity of the railway; and ( 4) that it would result in lower freight rates because of lower operating costs. Some o'f these arguments might be more valid if the IRCA were not already an established railway with a substantial investment in steam and diesel locomotives, together with maintenance shops and repair parts for these types of equip- ment, and also if Guatemala's hydroelectric power were an actuality instead of a potentiality. The case for electrification, in any event, has been very considerably weakened by the satisfactory experience which many railroads have had with diesel operation. IRCA now has in Guatemala approximately 375 miles of main-line track, 135 miles of branch-line track, and 80 miles of additional track in yards and sidings. Before the latest price increases, electrification of railway trackage in the United States cost in the neighborhood of $85,000 per mile, complete with substations and local distribution equipment but not including power plants or main power-transmission lines. Using this as a rough guide, electrification of the IRCA tracks alone would cost well over @50,000,000. It is also known that new electric locomotives now cost from @175,000 to @235,000 each for road engines and from @90,000 to @210,000 for yard types. IRCA now has in opera- tion 119 steam locomotives-of which 20 were recently pur- chased new-and also six new diesel-electric Jocomotives not yet in service. If only so percent of the present motive power were replaced by electric locomotives, the cost for this alone would _run from @10,000,000 to @15,000,000. In addition to the above costs there would also be the cost of constructing the power plants and main power-trans- m1ss10n lines and of operating and maintaining them. The 176 THE ECONOMIC DEVELOPMENT OF GUATEMALA cost of retooling shops and retraining both operating and shop employees would, of course, be added to the other costs cited. Finally, there is the possibility of petroleum production in Guatemala. As stated elsewhere in this report, it appears that petroleum may eventually be found in the areas north of Lake Izabal. If this proves to be correct, the importation of fuel may be reduced without resort to such extremes as elec- trification of the railway system. R ecommendation No. 45: Abandon the V erapaz Railway after completion of the Cohan-El Estor highway, retaining only its barge towboat service. The Verapaz Railway, an isolated line of 47 kilometers, is owned by the Government and operates between Pancajche and Panzos in the Polochic Valley. It forms a link between • the highway at Pancajche and a river terminal at Panzos, from which barge operations to Puerto Barrios are conducted by the same company. Use of this railway for export shipment from points south of Pancajche, such as Cohan, requires movement by motor truck or other road carrier to Pancajche, transshipment to rail at that point, to barge at Panzos, and to pier or directly to ship at Puerto Barrios. Barge operation down the Rio Polochic is slow and tedious. Only small towboats and barges can make the trip and even these are halted at times by low water below Panzos. Some freight is carried on this system but its movement is slow and hampered by antiquated methods and equipment. Train operation at the time of the Mission's visit to Guate- -mala consisted of two trains each way per week, each train consisting of approximately three cars. While it is difficult to obtain accurate data on tonnage hauled on this railway, it would appear that the annual total over the past 10 years has averaged no more than 5,000 tons. About SO percent of it has been coffee moving from the Cohan area for export. TRANSPORTATION • 177 Rates on the Verapaz Railway are very similar to those on the IRCA, both for export-import freight and for local freight. For example, coffee moving for export over this road (including barge movement to Puerto Barrios) averages from ~0.90 to ~l.10 per 100 pounds, depending on the railway station at which presented for shipment. A 1947 survey report by a private firrµ (Management Asso- ciates) indicates that the railway di~ision of the "Verapaz Railway and Annexed Services" was operating at a loss during a period of years immediately preceding their study while the waterway division (towing and barge service) was operating at a small profit. The Mission has not had the opportunity to verify these findings but in view of the small traffic carried by the railway its earnings at best cannot be appreciable. There appears to be a little justification for retention of this railway. The small volume of traffic does not warrant the heavy expense of placing it in first class condition. Actually, the Verapaz Railway serves a useful purpose at present only because there is no year-round dependable highway to carry the traffic now borne by it and because no barge-loading facilities are available on the Polochic-Izabal waterway north of its wharf at Panzos. Its present utility will disappear for all practical purposes as soon as sufficient repair work has been done on Rbute 7-E to permit safe passage of motor trucks from the Pancajche area as far as Panzos. Coffee and other com- modities can then move, without intermediate transfers or handling, directly to the Panzos barge terminal. Later, when Route 7-E has been made properly passable to motor trucks as far as El Estor, the barge terminal should be moved to that port to eliminate the slow and difficult barge movement between Panzos and Lake Izabal, and to permit through truck-haul from point of origin to El Estor. Abandonment of this railway will relieve the Government of a current operation which has no prospect of becoming either profitable or efficient and every prospect of becoming a financial burden if it is not one already. The rails and equipment, on the other hand, have at least some value if sold as scrap. 178 •THE ECONOMIC 'DEVELOPMENT OF GUATEMALA Recommendation No. 46: Abandon the projected railway from El Estor to Huehuetenango, and from El Estor to the Peten. Unquestionably there is need for more economical move- ment of products from the interior regions. The Mission has proposed positive steps to this end in its Recommendations Nos. 38, 40 and 41. · An alternative proposal now being considered in Guatemala is the construction of a railway between Huehuetenango and 'EI Estor, with a branch from El Estor northward into the Peten. It has even been suggested that from Huehuetenango the line should be extended to connect with the National Rail- ways of Mexico. The project has already received official support through Congressional Decree No. 694, authorizing the establishment of the railway s:ompany with government financial participation. The Mission considers this project completely unsound. One has but to examine the terrain to realize the tremendous difficulty of building a railway through these regions. The costs of construction of roadbed, track, bridges, dispatching and control systems, and other needed operating facilities over these routes would amount to at least ~150,000 per mile. To this must be added the costs for procurement of rolling stock and for the construction and equipping of the ancillary facilities such as freight and passenger stations, administrative offices, repair shops, roundhouses, storage and supply facilities, rail yards and water and fuel supplies. Irrespective of the type of fuel or energy used for traction, facilities for supplying power to the railway at appropriate points would have to be included in the total cost. One ambitious proposal for this project involves complete electrifi- cation, with power furnished by the construction of a series of hydroelectric plants. Although this Mission repeatedly asked one of the principal proponents of this project for a map showing the proposed location of the railway and for other details, no detailed descriptive material was ever received. A complete estimate of TRANSPORTATION 179 costs is impossible without such information, if indeed it actually exists. It is clear, however, that the investment would be enormous. There would also be the problem of recruiting, training, and in many cases housing the large operating, maintenance, engineering, administrative and supervisory forces required for the proper operation of the proposed railway system. Apart from the cost of this, there is grave doubt as to the existence in Guatemala of a sufficient number of qualified persons to form even the nucleus of the necessary personnel without either impairing the present organization of the IRCA or importing a large number of foreign workers for the purpose. The former would cause serious economic repercussions in the important areas served by IRCA, while the wisdom of the latter course would be open to question from the start. A review of present import and export tonnages and pro- duction possibilities in the areas to be served by the new railroad fails to promise sufficient traffic to pay even a sub- stantial fraction of projected operating costs. While mining in the Cohan and Huehuetenango areas, and forest products or possibly petroleum in the Peten, may eventually offer an appreciable tonnage of cargo for transport, these prospects are certainly not for the near future. Finally, there arises the question of comparative cost and flexibility of alternative transport such as trucks. Even if a railroad were built, all heavy cargo reaching it from even short distances would require motor transport for the purpose. Use of trucks in turn would require the construction of roads between the railroad and the sources of supply of cargo. To permit these same trucks to carry this cargo to a water terminus on Lake lzabal would eventually demand the con- struction of a heavy-duty highway. Yet because of the st~eper gradients and the sharper curvatures permissible on a high- way, it 'could be built for a much smaller sum than could a railway along the same general route. Furthermore, a high- way does not call for the construction of the many supple- mentary facilities required by a railway. 180 THE ECONOMIC DEVELOPMENT OF GUATEMALA Motor trucks operating over a good highway would offer at once a more flexible means of cargo movement and one requiring far less initial outlay for rolling stock. Likewise, the number of cargo trucks required for heavy hauling over such runs can be adjusted to the actual cargo much more readily than can the rolling stock and motive power of a railroad. Moreover, a railroad requires a high initial plant and organizational investment before it can operate even a small number of trains, and must maintain its heavy overhead costs as long as it offers any train service at all. Neither the length of haul nor the tonnages currently in prospect in this instance can be considered sufficient to over- come the advantages of motor trucks or to justify the con- struction of a railway. For the same reasons this Mission feels that no other new railway construction projects would be warranted in Guatemala at this time, except for trackage to serve the new pier recommended at Puerto Barrios. VI. Ports and Waterways Seaports Guatemala's ocean ports are limited to one of importance (Puerto Barrios) on the Atlantic coast and two of lesser sig- nificance (San Jose and Champerico) on the south coast. Livingston on the Atlantic and Ocos on the Pacific have lost whatever importance they once possessed and can be dis- regarded as deep-water shipping ports. El Estor, on Lake Izabal, cannot be considered an ocean port because of its inaccessibility to deep-draft ships. Inland Waterways Waterways, other than Amatique Bay and the Lake Izabal system, are currently of little importance in the economy. River transport is used for the movement of logs £tom the Alta Verapaz and some Peten areas, but the traffic is light and is not now increasing enough to demand any material improvements to these channels of transport. TRANSPORTATION 181 Of all of the various rivers used, only four-the Sarstun, the Salinas, the Pasion and the Usumacinta-are significant. The first is of some value because it · reaches the Atlantic within barge-haul distance of Puerto Barrios and connects with an existing road in the southeastern corner of the Peten at Cadenas. The last three are noteworthy because in combina- tion they serve as a usable waterway for canoe traffic and the movement of logs from the western Peten and the northern Quiche and Alta Verapaz areas. The Sarstun River The Rio Sarstun is currently used as a means of carrying intermittent barge traffic to Cadenas for transhlpment to Poptun and for occasional small shipments outward from that area. The Mission has no statistics on this movement but its volume is slight. Nor can any real increase be expected until more commercial or agricultural development takes place in the Peten and better means of transpqrt are provided from developed areas to the river. Still another factor militates against early growth of traffic on this waterway. The Sarstun is a boundary line between Guatemala and Belice, which makes it unlikely that improvements to the river will be made in the near future. Navigation without those improvements is limited to shallow draft boats because of shallow bar conditions ( depths around three feet) at the mouth; moreover, the mouth is exposed to direct wind and wave action from the Caribbean. No. river port facilities worthy of the name exist at Cadenas, nor does the prospective traffic warrant their construction. As long as the controversy over Belice continues and definite development in the southeastern Peten is not assured, the Mission believes that navigational improvement of the Sarstun River is not worth considering. The Salinas, Pasion and Usumacinta Rivers The three principal rivers in the southwestern Peten are potentially much more important than the Sarstun. They serve areas already producing timber for export and capable of 182 THE ECONOMIC DEVELOPMENT OF GUATEMALA producing more; they are longer and of greater potential capacity; and there is no apparent political obstacle if Guate- mala wishes to negotiate agreements with Mexico as to their improvement. Although such improvement has been advocated on various occasions, no adequate justification for expending funds for that purpose has come to the attention of this Mission. At present these streams appear to be carrying satisfactorily all existing traffic, which consists of local dugout canoes and logs floated down stream to the Caribbean coast of Mexico. No statistics are available to indicate either the volume or the value of this commerce, but these rivers will carry in- creased traffic of present types without improvement other than local snag removal. The Chiquimulilla Canal Improvement of the Chiquimulilla Canal on the south coast was completed several years ago, presumably to provide access to the Port of San Jose from the southern coastal areas of the Departments of Escuintla and Santa Rosa. Current traffic seems to be limited to the small boats of local traders and small produce growers. Continued minor maintenance of the canal is justified for local convenience, but material improvement for major trans- port purposes is not. Exports and imports through San Jose move almost entirely over the International Railways or over National Highway Route 3, which is now paved for most of the distance between San Jose and Guatemala City. The recent paving of National Route 6-E, between Escuintla and Taxisco, near the town of Chiquimulilla, has provided motor access from those areas via Route 3 to Port of San Jose. Recommendation No. 47: Construct an additional deep-water pier at Puerto Barrios, after suitable arrangements with IRCA. (Probable cost: about ~2.5 million, preferably as private investment) TRANSPORTATION 183 TraHic Volume Puerto Barrios is the most important port in Guatemala. Through it move the heavy export tonnages of the United Fruit Company and most of the export-import trade. Bananas, coffee, abaca and chicle form the bulk of exports ' while essen- tial oils, timber, honey and miscellaneous locally manufactured items such as leather goods and Indian-made textiles add .a substantial volume. Tonnages moving through the port in recent years are shown in Table XXI. The war years were of course subject to abnormal factors, but since the close of the war annual tonnages of both exports and imports have exceeded the best prewar years of 1938 and 1939. Whether the 1948 drop in tonnages was a return to normal after war shortages had been satisfied or whether it indicates the beginning of a downward trend remains to be seen. TABLE XXI ( ARGO MOVEMENT THROUGH PUERTO BARRIOS, 1938-48 (thousands of metric tons) Y ~ar Export Import T otal 1938 .... ................... 247.0 143.7 390.7 1939........................ 255.1 141.7 396.8 1940 .. .. ................... 213.1 161.3 374.4 1941 ...... .. ........ ... .. ... 188.9 137.7 326.6 1942...................... .. 155.6 119.9 275.5 1943 ........................ 87.4 92.9 180.3 1944........................ 150.6 118.2 268.8 1945 ............... ......... 250.9 164.7 415.6 1946 ........................ 272.2 142.2 414.4 1947 ........................ 342.6 173.5 516.1 1948.... . ............ .... .. 317.8 194.8 512.6 SOURCES: 1938-43 , INFOP, from Direcci6n General de Estadlstica; other yearz, Cuadro Estadistico de Aduanas. Port Conditions Puerto Barrios is the only deep-water port in Guatemala where vessels can tie up alongside a pier. The International Railway Company pier is the only one existing at the port. This pier can handle simultaneously four ships of the Victory 184 THE ECONOMIC DEVELOPMENT OF GUATEMALA type or equivalent plus two smaller ones in an emergency. Improvements now being carried out by the company will assure clearance for vessels of 28-foot draft. Anchorage space in the bay will accommodate others and tug and lighter service is available to handle their cargo. Puerto Barrios is isolated from the rest of the Republic as far as highway traffic is concerned because of the inexplicable failure of the Government to construct the portion of National Route 4 lying between Los Amates and Puerto Barrios. Inside Puerto Barrios the lack of adequately maintained streets is also marked. Access to the pier areas and to the pier itself is lim- ited to railway facilities. This is a natural consequence of the fact that the pier is owned and operated by the Railway Com- pany and that there is no motor vehicle traffic between Puerto Barrios and points inland. The situation has the practical effect of sending all traffic over one pier and all freight movement in this area over one artery, the railroad. In general, service by the Railway Company, both over its pier and in its rail operations, has been excellent despite the many criticisms levelled against it. In common with transport facilities throughout the world during the war and postwar periods, Puerto Barrios and the IRCA lines were overloaded, with resultant congestion and delay. The condition was par- tially relieved by the acquisition of new equipment and an improvement in procedures. Some congestion is still evident in the pier area, however, and in the season of heavy banana shipments it can be expected to increase. Contributing to this are the inadequacy of pier and storage facilities as the port and the inability of the Cus- toms Service to unload and clear railway cars at their Guate- mala City warehouses. Recent action by the Government has placed the responsibility for this unloading on the Railway Company. Nevertheless, until more space is provided for the i;espect of cargo in customs or procedures are changed to eliminate the need for it, congestion in customs will continue and with it the shortage of rail cars and resultant inability to move import cargo out of Puerto Barrios (see Recommenda- tion No. 32). TRANSPORTATION 185 Inherent Dangers A serious national hazard at this port is the fact that most of the export and import tonnage of the entire Republic moves over one pier. Destruction or material damage of this pier could slow such traffic to a trickle or possibly stop it altogether for a time. That this has not occurred in the past is no argu- ment that it could not happen in the future. An even more significant aspect of the situation in Puerto Barrios is that, to all intents and purposes, the area is under the complete control of the United Fruit Company and the International Railway Company. That control extends over the movement of practically all import and export cargo through the Atlantic areas. In the Mis~ion's opinion, notwith- standing a sincere effort on the part of the Railway Company to render satisfactory service to the public, this condition is unhealthy; it would, of course, be mitigated by control under a Public Utilities Commission and construction of a second pier. Back of the•situation lies the agreement, or series of agree- ments, under which the various links in the present railway system were constructed. In brief, Guatemala agreed that until about the year 2004, the Railway Company might operate free of taxation on its properties, free of payment of duties on its imports, free of control on its rates except as to certain very liberal maxima, and free of competition from other railways. Ownership or control of property in Puerto Barrios gives the Railway Company a virtual monopoly on the construction and operation of piers and on the use of the inshore harbor area. It is inevitable that this situation should give rise to charges of discrimination in rates and services between customers and to complaints of excessive charges against the public. Some of these complaints as to charges may be justified, as a re- view of ton-miie rates indicates. Likewise the heavy use of Puerto Barrios by the United Fruit Company, a large stock- holder in the Railway Company, may justify some complaints as to the slow handling of other cargo, even though it be rec- ognized that the perishable nature of the principal Fruit Com- pany export (bananas) requires that it be accorded prompt 186 THE ECONOMIC DEVELOPMENT OF GUATEMALA handling and therefor given right-of-way over less perishable products. Conclusions All the aforementioned factors, taken together, point to the need of additional pier space at Puerto Barrios. The most basic reasons, however, are the growing need for freer movement of cargo and the perils of national dependence upon a single destructible unit of this kind. The actual cost of constructing such a pier and its acces- sory facilities cannot be estimated closely without engineering surveys and plans. Based on the cost of the existing IRCA pier and of its probable replacement cost, however, it is be- lieved that a more modern but somewhat smaller pier to ac- commodate four Victory-type ships or their equivalent, could be constructed for about ~2,500,000. In view of the nature of this investment and the existing agreements between the Government and the Railway Com- pany it would be preferable, if possible, to ha~ e the Railway Company construct and operate this pier and provide the rail connections to it, rather than to have the Government do it. This would permit the Government to use the equivalent funds on other equally essential projects less adaptable to private financing. Construction could proceed without necessarily modifying the portions of the agreement covering ownership or control of lands and shore line. A more efficient terminal operation would be permitted through the placing of both piers under one management dealing with one union, with the flexi- bility in operations and the economy in labor which should result from that arrangement. The IRCA would get the additional business which could be expected to flow over both the new pier and the railway lines. In return with this expansion of port capacity it should be able to provide more rapid handling of all cargo and the prompt accommodation of more shipping, thus removing many of the present grounds for complaint. Creation of the Public Utilities Commission would safeguard the interests of the Gov- ernment and of the users. TRANSPORTATION 187 Recommendation No. 48: • Establish an efficient barge route between El Estor and Puerto Barrios. (Probable total cost: about @750,000.) Specific steps should include: (a) Dredging the Livingston bar to permit passage of barg~s of 500-700 tons and their tugs (@400,000) : (b) Constructing a barge pier at El Estor capable of serving two such barges simultaneously, with suit- able warehouse space (@100,000); ( c) Fostering a barge operating service between El Es tor and Puerto Barrios-possibly by a private company (@250,000). • The Lake Izabal-Rio Dulce waterway at present offers a water connection to the sea for products originating in the Department of Izabal between the Sierra de Santa Cruz and the Montana del Mico and for those portions of the Departments of Alta and Baja Verapaz lying within the broad limits of the Polochic Valley. With usable highway connections to the Peten and to the northern portions of Alta V erapaz, southern Quiche and southern Huehuetenango, this waterway would be of service to those areas also. It should be remembered, however, that cargo movements over this route are at present light. Exports of ore, coffee, and other products from these regions can be expected to increase if ' cheaper means of movement are provided and if proposed agricultural improvements are carried out. But there is no adequate economic justification for any heavy expenditure of funds in the immediate future to provide large-scale highway or waterway improvements in this area. A good barge service, coupled with appropriate portions of the highway network already recommended, would serve all prospective traffic for some time to come. Dredging Even now the Lake Izabal-Rio Dulce waterway itself could be used by small vessels from the sea to the head of the Lake 188 THE ECONOMIC DEVELOPMENT OF GUATEMALA without extensive improvement, although substantial expense would be involved if port facilities and channel markings and improvements adequate for ocean-going ships, even of small tonnage, were attempted. Barges of medium size (500-700 tons and about eight-foot draft) can operate without improvement to the waterway except at Livingston, where a shallow bar at the mouth of the harbor requires dredging. Dredging the Livingston bar sufficiently to permit safe crossing of such tug and barge equipment would be a simple and relatively inexpensive operation. It is estimated that this can be accomplished at a cost of about ~400,000. There is no basis at present for estimating annual maintenance costs there- after, but they should be small. Access to Puerto Barrios from the head of Lake Izabal could be provided in this manner with- out ex\;essive costs and without the necessity for providing facilities on the lake itself other than a small barge-pier or wharf with minor storage facilities for protection of goods in transit. Pier Construction Panzos-on the Polochic River and a terminus of the Vera- paz Railway-is now the head of navigation on this waterway. There is not even a usable barge port on Lake lzabal. Transferring the head of navigation to El Estor and pro- viding highway connections to that point (see Recommenda- tions Nos. 38 and 41), would improve cargo movement ma- terially along this whole route. This would permit abandon- ment of the Verapaz Railway line (Recommendation No. 45) and allow freight movement by truck from the Cohan area directly to El Estor, whence barges would take it to Puerto Barrios. Elimination of the tortuous channel of the Polochic River from the system would in itself expedite movement and would increase the service capacity of the barge equipment now operated by the Verapaz Railway. It is estimated that a small pier accommodating two barges of 500 to 700 tons, together with a modest warehouse or transit storage shed, could be provided at El Estor at a cost within ~100,000.  MAP VI Recommended Waterway Service . El Estor to Puerto Barrios -· Mn--- ~ TRANSPORTATION 189 Barge Service If it can be arranged, the barge service between El Estor and Puerto Barrios might well be operated by a private com- pany. The existing equipment could render valuable service at first although it would be best to acquire barges and tugs capable of moving larger pay-loads to permit economit.al and profitable operation. Medium-sized barges and shallow-draft tugboats with adequate power to handle them can be obtained at relatively small cost. It is estimated that four steel barges of the type described above and two suitable tugboats, with the necessary tow-tackle and miscellaneous accessories, could be obtained for not more than ~250,000. Recommendation No. 49: Abandon the project for creating a deep-water sea- port at El Estor. Proponents of the project to convert El Estor into a na- tional port for seagoing vessels point out that it would provide an alternate exit to the sea, freeing export-import trade from the monopoly of the International Railways and the United Fruit Company. This may be true but the cost of such a ven- ture would be so high as compared with the cost of improving connections and service in Puerto Barrios, that it is believed the concept of El Estor as a major seaport should be aban- doned. El Estor is a small settlement of huts virtually isolated from the rest of the Republic by lack of transport facilities. It is almost as isolated from the sea as well; for the waterway to the sea is suitable only for small craft and would require considerable improvement to accommodate large vessels. For a new port to be of commercial value it must have not only piers and anchorages with deep-water access and shel- tered conditions, but also such features as access highways, railways, airways, local living and service facilities and focal labor. More important still is the prospect of a large enough volume of import or export tonnage to pay the cost of pro- viding and operating the port facilities. This last requires a 190 THE ECONOMIC DEVELOPMENT OF GUATEMALA productive hinterland from which access to the new port is easier and cheaper than to an existing port. All of these con- siderations militate against the establishment of a new port at El Estor as long as Puerto Barrios can be made to serve Guatemala adequately.- The cost of providing a deep water channel from the sea to El Estor, capable of carrying ocean-going ships of worth- while capacity, would be very high. So also would be the cost of constructing and equipping piers; providing the fuel, water, and power supplies and the health and sanitary facilities nec- essary for proper operation; providing customs houses and warehouses; housing and office space for personnel employed at the port; expanding the village of El Estor into a town large enough to furnish housing, stores, schools and offices for the personnel employed at the port and their families; and providing adequate transport connections to the only areas (the south coast and the western highlands) at present capable of supplying the traffic necessary to support a port. Puerto Barrios already has most of these facilities and can handle increased traffic with a relatively small increase in investment. While numerous improvements are needed to make Puerto Barrios a proper port city, the essentials for the handling of all current import and export traffic are there. Highway access to the port, faster customs service and the desirability of constructing another pier have been discussed (see Recommendations Nos. 31, 32, 35 and 47). The expenditure of funds for construction of a rival or duplicating facility could not be justified if the needs of the Republic can be met by expending a fraction of those funds on expansion and improvement of the port at Puerto Barrios. Of special note, also, is the possibility that at least a portion of the proposed expenditures on Puerto Barrios may be sup- ported by private capital, thus releasing government funds for use elsewhere . • Recommendation No. 50: A void any large investment of public funds for im- provement of Pacific ports in the near future. TRANSPORTATION 191 San Jose and Champerico are the only two Guatemalan ports now operating on the Pacific Coast. At neither of them can ships tie up alongside the pier. Surf conditions and the unprotected nature of the coastline requires anchorage of ships offshore, to be loaded and unloaded by the use of lighters. Both ports have rail connections with the interior. The pier at San Jose is served by the International Railways of Central America, whose tracks connect it with the rest of the IRCA system. It is operated by the Agencia Maritima Nacional. The pier at Champerico is owned and operated by the latter agency. Combined rail rates and service charges at these two ports are identical within comparable areas. While these two Pacific ports still carry some export and import cargo, that of Champerico is now insignificant. It is possible that better connections with Quezaltenango might revive t~is port to some extent. Traffic seeking entrance and exit on the Pacific coast can be handled through the Port of San Jose, which is currently the more active of the two. The recent completion of a paved highway between Escuintla and San Jose and the pending completion of the paving on this highway between Escuintla and Guatemala City, gives San Jose a still further advantage over Champerico. In recent years San Jose has handled a very low volume of exports but has shown a steady increase in import traffic (Table XXII). Total tonnages are still far too small, however, to warrant extensive improvements to this port. Much, if not all, of the increase in import tonnage is a result of increased consumption of petroleum products, for which storage facili- ties have ~een constructed a short distance north of San Jose. Other ports have been proposed from time to time, chiefly by persons interested in creating competition for the virtual monopoly enjoyed by the International Railways through its ownership or participation in the control of port facilities at Puerto Barrios, San Jose and Champerico. Examination of the Pacific coast line of Guatemala fails to show a natural harbor location, or one where a protected harbor could be con- structed wit~out heavy orig.inal ·expenditure's 'and. the proba- -bility of heavy animal · maintenance dredging costs. Report- 192 THE ECONOMIC DEVELOPMENT OF GUATEMALA edly, the matter has already been investigated by the United Fruit Company and others and has been rejected as an un- economic venture. Total Guatemalan traffic via the Pacific and the Panama Canal, as indicated by recent tonnages pass- ing through San Jose and Champerico, does not appear to warrant heavy investments in Pacific ports at this time. TABLE XXII CARGO MOVE M E N T THROUGH SAN Josi AND CHAMPERICO, 1938-48 ( thousands of metric tons). San Jose Champerico Year Export Import T otal E xport Import T otal 1938. ........... 10.2 40.1 50.3 13.1 2.0 15.1 1939............ ll.3 45.3 56.6 14.5 2.4 16.9 1940 ............ 6.0 61.1 67.l 8.3 1.5 9.8 1941... ......... 4.6 71.3 75.9 11.8 1.1 12.9 1942 ............ 8.4 33.1 41.5 11.1 1.7 ·12.8 1943 ............ 21.1 20.5 41.6 13.4 0.7 14.1 1944... ......... 13.2 31.2 44.4 12.2 0.9 13.1 1945 ............ 17.6 69.9 87.S 10.8 1.3 12.1 1946......... ... 17.0 99.3 116.3 14.1 2.1 16.2 1947 .......... .. 14.2 133.l 147.3 15.2 8.1 23.3 1948 ............ 10.2 179.8 190.0 6.8 4.3 11.1 SouacEs : 1938-43, INFOP, from Direcci6n General de Esladbtica; other years, c..adro Esladislico de Aduanas. Recommendation No. 51: Abandon or defer the creation of a National Mer- chant Marine. A proposal for the establishment of a national merchant fleet has no doubt appealed to some Guatemalans because of their patriotic desire to see the Guatemalan flag flying at sea and the commerce of Guatemala carried in ships of domestic ownership instead of in foreign bottoms. These reasons of national pride constitute about the only points in favor of such a project, although there are many against it. The need for Guatemala to enter the maritim~ business as a means of providing ships to meet her international trade TRANSPORTATION 193 requirements seems remote. When facilities are provided for handling ships in Guatemalan ports without the delays now sometimes encountered at Puerto Barrios, there should be no lack of ships seeking to carry the cargo. If for any reason a shortage of ships should develop, the present operating com- panies could quickly add to the capacity of their fleets and tramp ships would fill in any gap left by such lines. There is an oversupply of cargo-carrying bottoms in the world today and every likelihood that this condition will continue for a long time unless a new world war breaks out. Creation of a National Merchant Marine would require the Government not only to procure the ships but also to establish a government agency to operate them. It would be necessary to recruit and train the personnel to operate the ships, the agency responsible for them and the maritime service. Home port facilities for employment and administration of personnel, repair and other facilities for the ships at home and abroad, and other ancillary services must accompany the establish- ment of a Merchant Marine Service, all of which require sub- stantial funds. Purchase of the ships would be only the initial investment. Unless they were kept in full service and could charge rates adequate to cover their complete cost of operation as well as defray the overhead costs of their management, maintenance and replacement, the Merchant Marine could easily become a continuing drain on the national treasury. There seems to be no justification for such a needless expense at present. The possibility of a shortage of ships in the event of an- other world war may, of course, outweigh other considerations m the eyes of the Government. In that event, it is suggested that a solution more economical than a Guatemalan National Merchant Marine might be a maritime service to be owned and operated jointly by several Central American Republics and, perhaps, Mexico. Such an organization-perhaps similar to the Gran Colombian Merchant Marine-could serve all of these Republics under appropriate agreements as to finances, management and operations. 194 THE ECONOMIC DEVELOPMENT OF GUATEMALA VII. Airways Recommendation No. 52: Expand domestic air lines to serve isolated areas pending construction of land transport facilities. Review of Conditions Guatemala's productive areas are separated by high moun- tains and numerous water barriers. The population is neither large nor evenly distributed. Potentially valuable regions are isolated. Resources are not uniformly developed. Travel and transport between production, population and market centers are generally difficult. Correction of this situation will of necessity be a long and expensive process. Fortunately, air transport, though limited by geographic and climatic conditions, offers an immediate partial relief. It can serve excellently as an interim means of transport during the early development of a potentially rich area, or while other means of transport are constructed. The country is now served by three air lines,1 plus a few domestic taxi-type passenger carriers. Regularly scheduled service within the Republic is confined to one line, Aviateca, owned and operated by the Government. The other two companies, Pan American and T ACA, carry international traffic only. The present discussion is, of course, concerned exclusively with domestic service and its role in national development. Aviateca Originating as a private commercial operation about 1941, the Compania Guatemalteca de Aviaci6n, Aviateca, passed under government control in 1944. At present it has a monopoly on cargo transport and a virtual monopoly on passenger transport between points in Guatemala, although in the latter field a few small independent operators work on a charter basis. 1 A fourth air line, "Skytrain", was closing out its business at the time of the Mission's visit. and is therefore not included as an operating line. .TRANSPORTATION 195 Aviateca has established a remarkable record of safety in its operations. Its flight operations are centralized at the Guatemala City Airport and extend to some 32 fields located throughout the Republic. The company currently uses 11 planes in its operations, more than half of which are of the DC-3 (twin-motor) type. The balance includes C-47, C-46, DC-2 and C-54 types and a N orduya Norseman. Some of these are owned by the company and some are operated under lease agreements. The passenger business of Aviateca is substantial, probably owing in part to the relatively low fares and the difficulty of travel over the highways. This traffic has been built up steadily since 1944, although the first half of 1950 shows what may be a decline in passenger travel. Cargo likewise has increased steadily, except in 1949, the first six months of 1950 indicating a marked increase for the entire year. Mail trans- port also shows a steady increase through the past six years. Recent statistics are shown in Table XXIII. From the financial standpoint, gross income in 1949 was slightly lower than in 1948, obviously as a result of the sharp reduction in freight carried. At least part of this decrease can be attributed to the small chicle harvest in the Peten, to which reference is made elsewhere in this report. Income for 1946, 1948 and 1949 is shown in Table XXIV. TABLE XXIII TRAFFIC OPERATIONS OF AVIATECA, 1944-50 Miles Passengers B agg age Cargo Mail Year flown carried (kilos) (kilos) (kilos) 1944 ·· ··· ····· ··••····· 335,019 6,498 20,316 3,076,958 3,463 1945 369,390 16,260 23,305 3,457,746 4,420 1946 ...... .. .. ...... .. .. 516,356 35,052 54,379 5,027,915 4,570 1947 ........ ............ 647,106 54,370 81,371 5,228,757 5,687 1948 .... ... ... ...... ... 900,289 73,961 76,678 6,006,743 6,069 1949........ 871,449 74,349 72,744 4,141,110 6,844 6 Mo. 1950 ...... 488,265 34,731 88,482 4,136,474 3,339 SOURCE : Compaiiia Guatemalteca de A v iaci on. 196 THE ECONOMIC DEVELOPMENT OF GUATEMALA TABLE XXIV INCOME OF AVIATECA, 1946-49 Passenger Freight and Total Year income other income rrouincome 1946 ........ .... ........ 0337,585 0532,967 0 870,552 1948 .................... 556,535 507,096 1,063,631 1949' ... 550,000 450,000 1,000,000 1 Estimated. SOURCE: c..atemalteca de Aviaci6n. Companla While data on expenses and operating costs of the company are not available, it is understood to be having difficulty in meeting its current operating expenses. This trouble is said to arise, in part, because of delays by various government departments in paying for services received from A viateca. No direct substantiation of this report has been received, although the Government's recent allocation of ~177,600 (from revenue to be. derived from increased coffee taxes) for the reported purpose of enabling the airline to pay its debts, would appear to support the allegation. Both passenger and freight rate charges by A viateca are low. Freight rates vary in accordance with the classification and nature of the articles transported. All freight and express rates seem to be based entirely on weight, rather than on combined weight and volume as is customary elsewhere. Air express rates are from two to five times the air freight rate for the same commodities between the same points, air express being the quicker method of shipment. The entire rate struc- ture appears to be designed to provide low-cost service rather than to make a profit. Viewed as a whole, the operations of Aviateca fill a great need in supplying transportation between points which are otherwise relatively isolated from each other by lack of usable highways. Although it is an expensive means of filling this gap, it is the only practicable way of doing so at the present time. Interim Transportation The resources and condition of industry in various areas, discussed in appropriate sections of this Report, indicate that TRANSPORTATION 197 until there is some real justification for major highway con- struction into the still-undeveloped areas it would be unwise to embark on the heavy expenditures which would be involved in these projects. The existence of Aviateca and the safety and success with which it has operated t'o date demonstrate air transport facilities to be a good interim means of serving these areas during their period of exploration and early development. Reasonable transport rates are essential to any exploration or development project, since high costs of moving personnel and supplies could easily kill the project. If prevailing low air rates make these operations a losing proposition to the aviation company, the Government might subsidize the opera- tions of the company. It can also provide the necessary land- ing fields and navigation facilities as a means of expediting development of these areas. In the case of privately owned air-service companies a portion of this subsidy might well take the form of a reduction or cancellation of the present high tax on gasoline. In short, it would be appreciably cheaper for the Govern- ment to assume a portion of the cost of this air transport service during the exploratory stages of development of new areas, than to commit funds to the construction of an hpen- sive network of highways to and in these areas during that period. It will be time enough to undertake such construction if and when real prospects of the development of an appreciable industry or extensive agriculture appear. Recommendation No. 53: Improve the airfields now used by domestic airlines and construct such added facilities as are needed to meet air transport requirements. (Suggested initial allocation: ~150,000) All commercial airfields except those at Guat~ala City and at Puerto Barrios are unpaved and the majority are of the most primitive type. The number of passengers and the amount of cargo carried justify substantial improvements m the interest of safety and more efficient operation . • 198 THE ECONOMIC DEVELOPMENT OF GUATEMALA While paving of all fields is not needed, an appreciable improvement could be made in the surface conditions and drainage facilities of most of them. Among the fields requiring work are those of Quezaltenango and Cohan where heavy movements occur and local flying conditions are generally poor. Specific project requirements for airfield improvement can- not be recommended without a detailed survey of each existing field and of regional needs for new fields. The Mission there- fore suggests a general allocation. ' of funds for the purpose, to be spent by the Ministry of Communications and Public Works on the recommendation of Aviateca, which would know best the immediate essential requirements for repairs and safety measures at all fields. It is estimated that about ~150,000, to be spent on improve- ments over and above all normal maintenance items will be needed for the most frequently used fields outside of Guatemala City and Puerto Barrios. No other air projects would appear to be justified at this time. This sum would be enough to im- prove drainage facilitie s, remove minor obstacles, level run- ways, and provict'e a sufficient amount of gravel on aprons and taxi strips and good grass or gravel on runways. Addi- tional allocations will, of course, be required as the need devel~ps. Recommendation No. 54: Reorganize A viateca as an autonomous state corpo- ration. Aviateca is one of several government-operated utilities which could probably be made self-supporting if reorganized, given an autonomous charter, and operated on a "company" basis. 2 Reference has already been made to the contrast between the excell~nt service and the precarious financial status of this air line. In its transfer from private to government hands, it has apparently retained the general form of the original com- 1 Since the Mission left Guatemala it has learned that action has been initiated by tbe Congress toward reconstituting Aviateca as an autonomous corporation as con· templated in this recommendation. • TRANSPORTATION 199 pany insofar as its operating departments are concerned although not in its fiscal management functions and methods. Aviateca has had to finance the construction of most of its fields out of operating funds, because the Ministry of Communications and Public Works has lacked funds for the purpose. Procurement of new airplanes depends on Congres- sional approval. It is difficult, at present, to place on any individual or office the responsibility for poor airfields, indebt- edness, unduly low rates, or for the timely replacement of airplanes as those on hand approach the scrapping point. Although reorganization might not solve all problems the Mission feels that the Government, the public and Aviateca itself would benefit if A viateca were reorganized as an autono- mous company or corporation, with complete responsibility for the successful operation of the company vested in a Direc- tor or Manager. Financial responsibility under such conditions would include the establishment of proper transport rates for passengers, express, cargo and mail, all under the general control of the Public Utilities Commission recommended else- where in this chapter. It would also include the establishment of proper sinking funds for replacement of equipment and of other appropriate reserves. Under such an arrangement all operations would be subject to audit by proper authorities and net profits of the company would be deposited in the national treasury if the company remained a government-owned enterprise. The only financial assistance which should thereafter be required from the Gov- ernment would be that necessary to meet specific deficits incurred in operations, for which the company would be ac- countable. The need for such assistance should become progres- sively less, except in the case of specific subsidies granted by the Government to maintain air service in undeveloped areas. VIII. Priorities and Expenditures General Policies Adoption of certain policies on the part of the Government is of first importance and a prerequisite to obtaining the full benefit of many of the projects recommended in this report. 200 THE ECONOMIC DEVELOPMENT OF GUATEMALA Some of these policies involve the clearing away of specific barriers now hindering the movement of goods and the devel- opment of more efficient transport. Others involve the adoption of basic programs and the prosecution of technical studies in order to insure wise expenditure of funds. It seems advis- able to place the abandonment of certain projects ahead of the physical prosecution of others, since this action will serve the double purpose of permitting better fiscal planning and of obviating any duplication or conflict between the projects recommended in this report and those which may have been proposed at other times but which are now regarded as unnecessary. It is essential that the improvement of communications proceed in an orderly and integrated manner and that the scale of improvement be geared to the financial resources of the Republic. A good beginning can be made by early adoption of the recommended policies and general programs concerning highways and air transport, and improvement of procedures and facilities in the customs service. These steps will serve to focus efforts upon well-defined directions of development, while at the same time helping to yield some early and tangible results. Establishment of the Public Utilities Commission might well precede any negotiations with the Railway Company on the matter of rate control, since the establishment of such a Commission would constitute incontrovertible evidence of the fair intentions of the Government in its plan for the adjudi- cation and coordination of rates and services. This order of events would also provide a ready mechanism for handling rate matters after completion of negotiations. Creation of the Public Utilities Commission should be accompanied by a beginning of construction of the highway joining Puerto Barrios and Los Amates because this section of Highway 4 is the key to the solution of many of Guatemala's export-import difficulties. At the present time, any large increase of motor vehicles would add to the burden of highway maintenance and the difficulties of movement over the highways, without commen- TRANSPORTAT10N 201 surate increase in the flow of commodities. Completion of National Route 4 and of the other paved sections recom- mended will, however, provide paved highway mileage suffi- cient to carry a substantial volume of traffic. To gain full advantage from the new roads, action should be taken to lower motor-vehicle import and sales tax barriers in order to encour- age the importation and use of cargo-carrying motor vehicles and commercial-type passenger carriers. Reduction of the gasoline tax will serve to reduce living costs through cheapen- ing of transport and will aid in encouraging tourist travel. Highway Access to Puerto Barrios The weakest link in transport facilities is the total lack of a highway connection between the present northern terminus of Route 4 (Los Amates) and the seaport of Puerto Barrios. It is the first, therefore, that should be strengthened. Early construction of this link will, in spite of the poor condition of the rest of that route, open the way for motor traffic between Puerto Barrios, the capital, and the rich highland and south coastal areas. Without this road-or at least positive proof that it will be constructed in the ·immediae future-there is no real indication that the Government is vitally interested in expediting or cheapening the movement of international freight. Likewise, without it there is no assurance that com- modities ma" move by road to the Atlantic seaboard if rail transport service is inadequate or unsatisfactory or if rail rates are too high. Ultimately, of course, the proposed program contemplates National Route 4 as a heavy-duty pavement extending all the way from Guatemala City to Puerto Barrios. Only then, for the first time, will Guatemala be free of the fear that any interruption of the railway will cut her "life-line". The entire project is large, however, and should not be assigned a single priority. Instead, the very highest priority should be given to the opening of the northernmost portion in partially completed form, because this will at least create a coutinuous road to the Catibbean. Repairing and rebuilding of other sections and the final paving of the whole highway can then be undertaken in logical steps, with the order of 202 THE ECONOMIC DEVELOPMENT OF GUATEMALA priority for each step properly related to the urgency of other national projects. As a first step a compromise should be effected between / the costly first-class paved highway that is contemplated eventually and the present low capacity roads of the exist- ing portions of National Route 4. The initial construction of the important Los Amates-Puerto Barrios link could well be limited to a gravel-surfaced rather than a paved highway. Width of roadway, drainage structures and bridges should be planned so that they will fit into the final project. Temporary substitution of a graded and gravelled surface for the final heavy pavement would permit deferring expenditures of around {?J25,000 per mile at present levels of cost and would also mean earlier opening of this strategic link. Because a long time will probably be required to complete the construction of the southern section of National Route 4 along the relocated route recommended in this report and because traffic must be maintained between Guatemala City and Puerto Barrios once the northern portion of that route is completed, it is important that sufficient maintenance and reconstruction work be carried out on all of existing Route 4 south of Los Amates. This should include strengthening and repair of all bridges and culverts, drainage ditch repair, the provision of occasional vehicle-passing points, and'the addition of sufficient gravel or crushed rock to the surface to permit truck traffic in all weather. Some widening and straightening of the roadway at dangerous or difficult points may also be found necessary. These measures will insure that commercial vehicles can operate over this road to the port while better highway connections are being constructed. This phase of the work is therefore placed high on the scale of priorities (Table XXV), yielding place only to two other highway pro- jects of primary necessity and some small but urgent projects of other types. Circumstances dictate a logical order in which the remain- ing parts of the work on Route 4 s~uld be done, with priorit_ies somewhat lower. Improvement of the southern section before the central section is advisable. Financial limitations suggest TRANSPORTATION 203 that these parts, too, should be constructed at first to final specifications except for paving and put into use with a good gravel surface. Completion of the paving can then await ;,cheduled funds, after the allocations for certain other pro- jects as shown in Table XXV. Because of the rough terrain to be traversed, the southern sectiory of this highway between El Rancho and the capital forms a more difficult obstacle to traffic than does the central section between Los Amates and El Rancho. Elimination of this obstacle should increase the usefulness of the entire high- way more than would similar action in the central section. Furthermore, a substantial portion of the southern section of the highway, if relocated along the upper Motagua and Las Vacas Rivers, will also benefit the Salama-Rabinal Valley area and can serve as a part of a future road connecting Guate- mala City and Cohan, replacing the existing scenic but moun- tainous and narrow highway (National Route 5) connecting those points. This dual use will save a substantial amount of construction funds on the latter project. Reconstruction of the middle section of Route 4 (Los Amates to El Rancho) to full final specifications except pav- ing (but with a gravel surface) deserves priority after the two end-sections. This action will complete the highway route across the continent and give full use to National Route 3, the finished portions of National Route 4 and other routes serving the Capital. The Los Amates-El Rancho road will also improve highway access to Puerto Barrios from Zacapa, Chiquimula, Salama, and Cohan, and will further reinforce the effects of the improved highway system on competitive transport rates and services. South Coastal Highway Although a good paved highway along the southern coast would pass through an area already being served by the lines of the International Railways of Central America, such a highway would probably carry more local traffic and would benefit internal commerce · in general more than would any other paved road in the Republic. Therefore the combined route from the capital to Puente Talisman, via National 204 THE ECONOMIC DEVELOPMENT OF GUATEMALA Routes 3, 6-W, 13 and 1, is given a starting priority second only to the opening (without pavement) of the northern link of the Puerto Barrios Highway. Moreover, because of its local importance and lower estimated cost, it is contemplated that the actual paving of this highway will be finished before that of National Route 4. As in the case of Route 4, this south coastal highway work should be divided into parts, each with its own position in the scale of priorities. The above-mentioned high starting priority applies to completion of the pavement between Guate- mala City and Escuintla. Final completion of the entire road can then be accomplished in two succeeding projects placed lower in the scale: · Some of this highway already has been improved to a point where paving could be done without substantial recon- struction; other sections are in deplorable condition. Because of the type of local traffic expected to use the road and the fact "that portions of it have already been c~vered with a lower-grade pavement than that of the Pan American High- way, it is believed that the entire route could be completed to conform to the character of the section already finished, rather than to first-class specifications. Pan American Highway Completion of the Pan American Highway will provide a connection between Guatemala, Mexico and El Salvador over which should flow heavy motor tourist travel, with attendant economic benefit to Guatemala. It will provide an east-west artery through the Republic, connecting major cities and areas and increasing the flow of commerce. It will assist particularly in the development of the Quezaltenango area and of the Departments of Huehuetenango and Quiche. Continuation of this project at an increased tempo, especi- ally on the section linking Guatemala with Mexico, is urgent. Not only is the highway an important part of the basic road network of the country but it is also clear that some signs of real action may be necessary if Guatemala is to continue to receive the much needed financial contributions (two thirds TRANSPORTATION 205 of the cost) now made by the United States for this con- struction. Among the road-building projects, therefore, connection of the Pan American Highway with the completed Mexican portion of the same route is given the third highest priority. Its completion to the border of El Salvador is placed lower, but before final paving of National Route 4. Coba:n-EI Estor Highway A fairly high priority is assigned to the low-cost initial work required on National Route 7-E, in order to put this road into service. Related and next in order is the construction of the modest barge pier at El Estor. These two steps will allow early abandonment of the unprofitable Verapaz Railway line and the transfer of its barge terminal to El Estor, with great gains in time and utility compared with the present rail-river movement between Pancajche and Lake lzabal. Deferment of the final paving of Route 7-E until later and concentration of initial efforts upon getting the road open, will enable coffee and other moderately light cargo to move by truck to El Estor at an early date. The larger funds which would be needed for paving, meanwhile, can be directed into projects of high priority in the first years of the program. Other Projects Priorities for the remammg projects have , been asi,igne<l in Table XXV to permit each to precede or follow others in a logical manner. While the reasons for their individual positions are obvious in most cases, a few remarks on some of them may be appropriate. Solution of present transportation problems calls for con- tinuous development of domestic air lines, especially to reach new areas not yet provided with surface communication. Early improvement of existing fields is urgent from the standpoint of safety, and some new fields will be needed. Nevertheless, any major projects for air transport to isolated regions should await substantial progress on other projects answering the more pressing demands of populated and productive areas. 206 THE ECONOMIC DEVELOPMENT OF GUATEMALA Airway improvement is therefore given a high priority but a very limited budget at this time. The importance of the construction of a new pier at Puerto Barrios has not influenced its position on the recommended priority list as much as has the possibility of its construction from private funds. If immediate construction were attempted it would, of necessity, have to be carried out by the Govern- ment, possibly without complete arrangements for highway access, rail connections and rate agreements, and probably without proper prior arrangements for its operation. The Government will be in a much stronger position if it first constructs the northern section of Highway Route 4 and carries out the necessary negotiations with the Railway Com- pany before construction of the additional pier is undertaken. In this way it probably can avoid either a breach of contract or exercise of the right of eminent domain. Completion of a good highway connection across the western highlands through Quezaltenango is considered among the most urgent of the remaining projects. This high- way is relatively short. Its location is such that it can be constructed at less cost than the only other remaining paved highway recommended in this report. It will provide Quezal- tenango, the second city of the Republic, with a good highway connection to the railways and paved highways of the south coast and, by means of the Pan American Highway, to the north, east and west. Motor tourists and commercial highway traffic will also use the road to reach the Quezaltenango area, the western highlands, and the south coast. These advantages appear to outweight in importance those of a paved highway route from the Cohan area to the sea or the two develop- mental roads proposed. A higher priority is, therefore, assigned to the Quezaltenango connection. The highway-waterway route from the Cohan area to Puerto Barrios is considered sufficiently important to include in a basic program of improvements to be undertaken or sponsored by the Government. It can, however, be developed on a piecemeal basis. In comparison with the southern high- land and coastal regions, this area has neither the population TRANSPORTATION 207 nor the production to justify a high priority for the whole project. Final paving of the highway is therefore given a low position. If it is necessary to establish priorities between the portions of the highway itself, it would be advisable .to complete first the northern portion between Cohan and El Estor, then the southern portion between Cohan and the relocated National Route 4. The possibility of obtaining finan- cial contribution from mining interest in the Cohan area for the northern road should be investigated. The two remaining projets recommended are both of the developmental type and could well be grouped in a single prior- ity. A highway connection from Cohan to the Sacapulas and Huehuetenango areas would, however, serve a larger present population than would one between El Estor and Cadenas. It would also .provide a useful means for testing the practicabil- ity of exploiting the potential mining industries near Huehue- tenango, by offering them an additional exit to the sea through the Polochic Valley route. The Coban-Huehuetenango road has accordingly been placed in the priority above the El Estor- Cadenas road. If conditions should change prior to the start of either of these projects-say the discovery of petroleum in the Peten-it might be necessary to reverse the priority posi- tions assigned to these two developmental roads. No scheme of priorities can be considered an inflexible document. Both the availability of funds and changes in the national situation may, from time to time, dictate changes in the order of priority of projects. The present analysis and Table XXV will have fulfilled their purpose if they form a partial guide in the preparation and realization of a systematic development program. Technical and Financial Limitations The scarcity of technically trained personnel and of many types of skilled labor, paticularly in highway construction machinery and equipment operators, makes it imperative that sudden, large expansions in the public works programs be avoided and that construction plans and schedules be carefully prepared. All new projects will require field surveys and the preparation of detail~d engineering plans and specifications. 208 THE ECONOMIC DEVELOPMENT OF GUATEMALA If projects are to be carried out under contract, highly qualified engineering inspection personnel will be required. Projects carried on directly by the Government will require a large group of supervisory and technical personnel as well as skilled machine and equipment operators. Acquisition of the neces- sary numbers of trained personnel will require time and care- ful selection. It is impossible to estimate the length of time that might be required in these preliminary steps. Some preliminary work has already been done on a number of highway projects; on others, the basic highways are already in existence but require modification; on still others, such as the Pan American Highway, plans and specifications are reasonably complete and little added work of that type is required. As a guide, it is recommended that on completely new · projects at least one year be allowed for the execution of field surveys, preparation of plans and specifications, preparation of bids for work to be done under contract, and organization of the work. Where some preliminary work has already been done, shorter periods could be allowed. But it should be kept in mind that time spent on obtaining technical data and prep- aration of proper technical plans will save both time and money when the project is actually constructed. If an expanded program of highway construction and im- provement be launched, in its first year or two the annual budget of the Department of Highways should be limited to a total of not more than double the present annual appropria- tion. Even less might be desirable in the first year, since a sub- stantial part of the increased funds would be spent on surveys and preparation of plans for projects of high priority. Calculated on a present annual highway budget of approxi- mately four million quetzales, including two million quetzales for maintenance, a six-year program might be established roughly on the following basis : (1) First year- a. Normal budget ...................... .... .......... 0 4,000,000 b. New program ............. ... ... .. ........ . 2,000,000 First year, total 6,000,000 TRANSPORTATION 209 (2) Second year- a. Normal budget ............. .. ... .. ......... .. .. .. 4,000,000 b. New program 4,000,000 Second year, total 8,000,000 (3) Third year-total budget... .. .. .......... .. .... .... ... 9,000,000 ( 4) Fourth year-total ,budget.. .. .... .. .... .. .. ....... .. 9,000,000 (5) Fifth year-total budget... .. ........... ........... .. ... 9,000,000 (6) Sixth year-total budget... .. .... .................... . 9,000,000 Six-year program, total 050,000,000 In this way, a total program of some 26 million quetzales over and above the normal annual budgets for highways could probably be absorbed. Too great a strain on the human re- sources of the Republic could be avoided by employing a reasonable number of qualified foreign technical personnel and allowing construction under contract by qualified and repu- table foreign, as well as national, firms. Finally, it must be stressed that the recommended expendi- tures in the six-year period do not envisage completion of the whole basic highway network, since it is clear that Guatemala is not likely to have either the financial or physical resources necessary for rapid implementation of such an ambitious pro- gram. Nevertheless, by the end of the six-year period with which the report is concerned, Guatemala should possess by far the greater part of a modern transportation system to serve the needs and promote the development of the Republic. SUMMARY OF RECOMMENDATIONS AS TO POLICY 1. Adopt a basic plan for development and maintenance of good highways (Recommendation No. 34). 2. Establish a National Public Utilities Commission (Recommendation No. 30). 3. Conduct negotiations with IRCA (Recommendation No. 31). 4. Expand domestic air lines (Recommendation No. 52). 5. Reduce· tax burdens on transportation (Recommenda- tion No. 33). 6. Expand the capacity of the Customs Service (Recom- ,nendation No. 32a, c, d). 210 THE ECONOMIC DEVELOPMENT OF GUATEMALA TABLE XXV SUGGESTED ORDER OF PRIORITY FOR WORK PROJECTS 1. Build section Los Amates-Puerto Barrios of National Route 4 ( Recommendation 35) ............................................... . 0 4,700,000 2. Pave relocated sections of National Route 3, between Guatemala City and Escuintla (Recommendation 37a) .. .. .. 1,000,000 3. Construct an additional warehouse in Puerto Barrios (Recommendation 32b) ......... ................................................... .. 250,000 4. Begin improvement of existing airfields and building of new ones (initial investment) (Recommendation 53) ........ 150,000 5. Complete section of Roosevelt Highway to Mexican border (Recommendati,m 36) ....................................................... .... .. .. . 3,000,000 6. Repair and improve central and southern sections of National Route 4 (Recommendation 35) .. ................. .800,000 7. Repair sections of National Route 7-E (Recommendati~n 38) .............. ...... .. .......... .................................................................. 700,000 8. Construct barge-pier in El Estor (Recommendation 48) ... . 100,000 9. Carry on work on route Escuintla-Puento Talisman (Recommendation 37b, c) ........ .......... .. ............................ ............ 3,000,000 10. Build southern section of relocated National Route 4 (Recommendation 35) ........ .. ...................................................... 6,755,000 11. Rebuild central section of National Route 4 (Recom- mendation 35) .. ............................................. ... ............................. . 4,810,000 12. Construct additional pier in Puerto Barrios (proposed as private investment) (Recommendation 47) .......................... .. 2,500,000* 13. Improve and construct highway San Crist6bal-Quezal- tenagno-Retalbuleu (Recomendation 39) ............... . 2,500,000 14. Complete route Escuintla-Puento Talisman (Recom- mendation 37b, c) .................................................................... ..... . 7,760,000 15. Complete Roosevelt Highway (Recommendation 36) ...... .. 6,000,000 16. Pave National Route 4 (Recommendation 35) .... .. ...... ....... . 4,000,000 17. Improve National Route 7-E, Cohan-El Estor (Recom- mendation 38) .... ........... ...... .......................................................... 4,000,000 18. Improve lzabal-Rio Dulce waterway and establish barge service (Recommendation 48) .... .. ................................ .......... .. 650,000 19. Build connecting highway between Cohan area and relo- cated National Route 4 (Recommendation 38) .................. .. 2,500,000 20. Build light road Huehuetenango-Coban (Recommenda- tion 40) ...................................................... ....... ... .............. .. ... .. ... .. 2,000,000 21. Build light road Cadenas-El Estor (Recommendation 41) 1,500,000 Total .................... ...... ............ .. .......................... ...... 58,675,000 *Less pier Puerto Barrios ..... ......... ..................... .. . 2,500,000 T otal public investment... .............. . 056,175,000 22. Public Utilities Commission (Recommendation 30) - Per year .................................. .................... .. ................................ .. foo,ooo  CHAPTER VI Teleconununications I. International Service Good telecommunication services between Guatemala and other countries are provided by the Tropical Radio Company and the All-America Cable and Radio Company. Some minor external traffic is also handled by a small government-operated system connecting with Mexico by radio and with EI Salvador by wire. Tropical Radio Company service includes ·both radio- telephoQ.e and radio-telegraph with connections to practically all foreign countries and is of excellent quality. This company is at present completing a new station, to be operated in conjunction with the Government under an agreement which will leave management of operations and a portion of the profits (with a guaranteed minimum amount) to the Company and an equal share of profits to the Government. The contract contains certain tax remission features and an option clause permitting the Government to take over the equipment of the station at the end of nine years under certain conditions. The arrangement is reported to be satisfactory to both parties. Service of the All-America Cable and Radio Company passes through a land-line to San Jose on the south coast. From there it connects by submarine cable with Panama and other Central American areas and with the East Coast of the United States, where telephone, telegraph, and radio connec- tions further extend the network. This company also operates under its own contract with the Government, although the terms are somewhat different from those of the Tropical Radio Agreement. With the several services, external teleco'mmunications are both adequate and satisfactory. Rates for telegraph messages and telephone service conform to those adopted by inter- national convention and are not subject to increase or decrease in Guatemala except through local taxes. 211 212 THE ECONOMIC DEVELOPMENT OF GUATEMALA IL Domestic Service 1. PRESENT NETWORK Most of the domestic telecommunications facilities in the Republic are owned and operated by the Government. The network includes telephone, , telegraph and radio, although these are not completely integrated into a single system. To- gether they provide contact between all of the principal points in the country, as well as with some of the more isolated regions. Local telephone service is available in a number of areas but is not usually connected with the long distance lines. While the above-mentioned facilities are controlled by the Director General of Telecommunications, there is also the separate radio network of the government-owned Aviateca, employed in its airline operations and weather reporting. In addition there are some private telephone and telegraph sys- tems, such as those of the International Railways and the United Fruit Company, for dispatching and other special purposes. In connection with fruit movements Tropical Radio Company operates small domestic facilities at Guatemala City, Puerto Barrios, Escuintla, Tiquisate and Bananera. Were it not for the condition of the government-owned services, cov~rage of the Republic could be considered fairly good. As it is, however, internal service is slow and unsatis- factory. Its principal defects are obsolete equipment, poor construction and inadequate organization of facilities. Given proper maintenance, the system probably can continue to be used for an appreciable time, but there is room for much improvement. 2. LOCAL TELEPHONE SYSTEMS Municipal and rural telecommunications are conspicuously lacking. Except for the capital city and a few other areas, including those served by the special-purpose private systems, good local telephone networks are virtually nonexistent. In Guatemala City a modern Swedish automatic system has recently been installed. The new plant functions satis- factorily but has capacity for only 5,000 telephones. The city TELECOMMUNICATIONS 213 needs at least twice this number to meet current requirements and probably could absorb a total of as many as 15,000 instru- ments in a short time. There are already many complaints from potential subscribers unable to obtain service con- nections. Outside of Guatemala City the government-owned tele- phone and telegraph systems are in poor condition and the service is generally unsatisfactory. Plant and equipment are largely out-moded; transmission lines are of low-grade materials and construction and are poorly maintained. Quezaltenango, second largest city of the Republic, has an obsolete German system whose capacity is limited to 1,000 telephones. Antigua, likewise, has service of poor quality and restricted capacity. These systems need to be completely revamped and enlarged according to approved technical stan- dards in order to fit properly into an eventual national network. Many other important cities and towns have either poor local service or none at all. A number of these, each with its surrounding rural population, appear capable of supporting a modern local telephone service and contributing to support of the long distance system. Specific examples include Cohan, La Union, San Pedro Carcha, Zacapa, Jalapa, Jutiapa, Chiqui- mula, Mazatenango, Puerto Barrios, Escuintla, Antigua, Totonicapan, Quezaltenango, Coatepeque, Retalhuleu, Chimal- tenango, Comolapa, San Cristobal T., Momostenango, Hueiwe- tenango and Senahu. • 3. LONG DISTANCE SERVICE Domestic long distance telephone service is neither ade- quate nor satisfactory. For the most part it operates on a town-to-town, rather than house-to-house, basis. Service in most towns is restricted to one terminal station, not inter- connected with the local municipal system. The lines of the long distance system are of bare wire, mostly of galvanized steel, and generally carried on wooden poles of an inferior grade. Much of the system is of the single-wire type. Mainteni.nce is difficult because of the ter- 214 THE ECONOMIC DEVELOPMENT OF GUATEMALA rain over which these lines are carried and the low-grade quality of their construction necessitates constant repair. The result is frequent interruption, delays and poor quality of transmission. 4. TELEGRAPH Telegraph service in the Republic is more extensive than telephone and is reported to be more reliable. It is carried on the same lines as the telephone, however, where both services are maintained and is subject to many of the same delays and interruptions as the telephone service. Fortunately, mail service, including air mail, is good and helps materially in solving the problem of internal long distance communications. ' 5. RATES Telephone rates for domestic service do not differ greatly from corresponding rates in other countries. Although there are occasional local complaints that they are high-especially in Guatemala City-examples shown in Table XXVI fail to support such charges. TABLE XXVI DOMESTIC TELEPHONE RATES FOR VARIOUS CLASSES OF SERVICE Location Category Class Monthly Rate • Guatemala City • Commercial A 08.00 Guatemala City Commercial B 6.00 Guatemala City Residental C 3.50 Elsewhere Commercial 2.00 Elsewhere Residental 1.00 Elsewhere Rural (farms) 2.00 NOTE: Installation charges, paid by subscriber, include cost of all materials and labor. Interdepartmental long distance service costs ~.SO for the first five minutes and @. 25 for each additional five minutes, with double charges for service on Sundays and holidays. Rates are irrespective of distance. This, of course, is favorable to the subscriber on the more distant calls, but may cause him to complain if all or most of hi°s calls are to nearby points.  TELECOMMUNICATIONS 215 III. Improvement Recommendation No. 55: Complete a basic plan to guide uniform develop- ment of the national telecommunications network. ~ Need for a \learly defined plan for eventual development of an integrated communications network is recognized by the Government. The Director General of Telecommunications has, in fact, prepared a broad outline of goals and it is under- stood that on this basis a six-year program of development is being considered. Observations of the Mission indicate, however, that exist- ing plans are based more upon general regional needs for service than upon the technical requirements for an ultimately integrated system. What is really needed is a master technical plan, including not only the geographical distribution of lines but also the desirable specifications for construction, electrical characteristics of the lines and stations, and similar details. With this as a guide, all new installations or improvements in parts of the system can be required to conform to a final network. To proceed without it is to risk the installation of various individual lines and equipment which might later have to be replaced, with consequent waste of effort and funds. The preparation of a technical plan of this type is a serious undertaking, requiring highly qualified telecommunications experts. Several months of field survey work and engineering study will be necessary to determine actual requirements and to draft the necessary plans and specifications. A market survey should also be made to estimate the true demand for service in each locality and thus to strengthen the program now being prepared by the Director General of Telecommuni- cations. In all probability a reputable and experienced telecommuni- cations company, (which is likely to be the source of the best available engineers in this field), would be willing, if awarded the construction contract, to make the necessary surveys and plans without special charge as part of an installation project. • 216 THE ECONOMIC DEVELOPMENT OF GUATEMALA Such a company could, however, be engaged to make the necessary studies at a reasonable cost, if desired, without an accompanying installation contract. At a rough estimate the cost of the work might range from ~25,000 to ~50,000, depending upon the terms of an agreement and the degree of detail desired. Recommendation No. 56: Reorganize government-owned telecommunications systems to give them autonomous status, instead of direct operation by the Ministry of Communications and Public Works. Experience in many parts of the world to date indicates that where a public utility is government-owned, its actual operation can usually be more successful and economical if conducted under its own separate administration. With autonomous status, a government-owned corporation can continue to provide a return on the government's invest- ment, but is in a better position to manage its funds for profit- able operation than if it ·must constantly depend upon legis- lative appropriations. Operation, maintenance and expansion can then be planned intelligently on the basis of its own revenues and credit. Its officials, given this freedom and relieved of the uncertainties of appropriations beyond their control, can then be held responsible for successful perform- ance. For these reasons, as well as to lessen the burden upon government offices and free them for their more normal public administrative functions, the Mission is of the opinion that the telecommunications systems should be reconstituted as autonomous organizations. Guatemala City System The telephone system now serving Guatemala City might be selected as the first for reorganization and could become an autonomous public corporation. It is already a going con- cern and large enough to show definite results in two or three years of new operation. It is also close to the seat of govern- • TELECOMMUNICATIONS 217 ment, permitting close observation in the early years to yield lessons of experience for application elsewhere. Validity of the present rates could be more easily measured under such a business-like arrangement. These, of course, should be adequate to meet expenses, service on loans for expansion, and any profits expected by the Government. Their maintenance or modification should be determined by the proposed Public Utilities Commission (see Chapter V, Recom- mendation No. 30). Long Distance System In the case of the long distance telephone and telegraph system, the problem is not as simple. The facilities are in far worse physical condition than those of the capital or most other local systems; to put them into good condition will require much more capital. Aside from those facts, however, the same reasons exist for removing this system from direct operation by the Ministry of Communications and Public Works. It should be organized as an autonomous government-owned company when the national resources ( or financial arrangements made by a com- mercial company under suitable governmental concessions) permit renovating it to a point where it can earn its way. Smaller Local Systems Ever.i if direct operation of a long distance service by the Government is feasible, the Government will face an in- creasingly difficult situation if it attempts centralized operation of all municipal or local telecommunications. The need for some provision for relieving the Central Bureau of this problem is certain to arise and a plan to meet it should be prepared in advance. It is the opinion of the Mission that the best solution for the smaller local telephone systems outside of Guatemala City might be construction and operation under cooperative or private enterprise, or as municipally owned companies. However organized, regulation of local rates and services should be under the jurisdiction of the proposed Public Utilities Commission.  CHAPTER VII Power I. Present Power Situation 1. DEMAND Electric power has played a comparatively minor role in Guatemalan life. That the available power resources are not fully exploited is not the result of an oversight; nor is it merely because of a shortage of funds for their development. More fundamentally, it is because the country's productive efforts have been predominantly agricultural, and much of that primitive. Present power requirements for agricultural purposes are principally for coffee processing and for irrigation, with the latter limited to a few developments of fruit and sugar cane of which the largest are those of the United Fruit Company. Manufacturing consists primarily of small-scale operations in or near the capital of Quezaltenango, together with a few small factories such as those in the vicinity of Cohan, Totoni- capan and Chimaltenango. vVith the exception of one cement plant in the Guatemala City area, none of these industries individually uses much electric power. For the country as a whole, manufacturing accounts for only a small proportion of the total use of electrical energy. Residential consumption is, therefore, much greater than either agricultural or manufacturing use at the present time. This is true even in Guatemala City where, despite a con- centration of industry, home lighting and equipment such as stoves and heaters consume about two-thirds of the electricity sold. To this must be added the fact that the capital city absorbs about three fourths of all the electric power con- sumption of the Republic. There can be no doubt that wider use of electricity would contribute to Guatemala's development. Greater mechaniza- tion of existing factories as the Mission advocates, and also 218 POWER 219 new industries suggested in Chapter III can be established only if generating capacity is expanded. Such new uses of power will require the cooperation of the Government and the workers in the first instance and that of industrial capital in the second. There has been a steady growth of demand for electric power, at a rate of possibly six to seven percent per year. The company now supplying most of the country's power expects to be able to meet all demands for 1951 but antici- pates the necessity for some expansion in its plant in the following year. 2. PRODUCTION Because of available power streams and the fact that coal, oil or gas supplies have not been found ( or their possible existence even explored), the source of power is primarily hydoelectric. Most of the country's electric power is generated in privately owned plants (Table XXVII). The publicly owned plants are extremely important, however, as their wide dispersion brings service to many of the smaller towns and villages. To meet the present demand of the Republic there is a total installed generating capacity variously reported at from 25,000 to 40,000 kilowatts in scattered plants ranging from one to 7,000 kilowatts in size. Taking the reasonably authenticated total capacity of all plants of all sizes reported to the Mission and allowing for a margin of error, it is probable that the actual total generating capacity lies between 35,000 and 40,000 kilo- watts. A substantial part of this is concentrated in the vicinity of Guatemala City. Empresa Electrica de Guatemala Of the private companies operating these plants the most important is the Empresa Electrica de Guatemala, a subsidiary of American and Foreign Power. This organization supplies approximately four fifths of all electric service in the country. Of this large fraction, about 92 percent is sold in the Guatemala City area. The Empresa Electrica operates six hydroelectric 220 THE ECONOMIC DEVELOPMENT OF GUATEMALA stations and one steam plant, with a total installed nominal capacity of 17,295 kilowatts. Under a SO-year agreement dating from 1923, this company supplies electric energy to the capital area without direct gov- ernment control except as to maximum rates. It is, however, subject to legislation affecting wages, employment and similar matters. TABLE XXVII PRINCIPAL POWER PLANTS, 1950 Connected load Capacity Name of plant or owner Location (kw.) (kw.) Empresa Electrica de Guate- Guatemala City 42,360 mala ( Ebasco International Antigua .. .... .. ....... . 885 Corporation) (Private) Escuintla ...... .. .... .. 508 Palin ............. .... ... .. .. ...... ... 108 Amatitlan 825 Villa Nueva .... 307 (Total) 44,993 17,295 Empresa Hildroelectrica de! Estado, Planta N acional de Santa Maria (Public) Quezaltenango region .... 4,0001 International Railways of Central America (Private) Puerto Barrios .. .. ...... .... .. 1,000• United Fruit Company Tiquisate .... .. .. .. .. .. 900 (Private) Bananera ........ .. 1.150 Other Private Chimaltenango 1,500 Los Cerritos .... 1 ooo• Cante! Mills .......... . '700 Finca Palo Gordo ....... .. ... 800 Municipality of Zacapa Rio Hondo (Public) Zacapa 600 Municipality of Retalhuleu (Public) Retalhuleu .......... . 200 Other publicly owned plants : The available list, probably incomplete, shows 68 others in this catego~y. Individual capacities range from two kw. to 200 kw., but most are under 50 kw. Other privately owned plants : About 40 plants with individual capacities of 50 kw. or greater and aR unknown number of smaller ones from two kw. up. Some are stand-by plants for private use only ; others are in constant use, with power either for private industrial consumption or public sale. 1 In two units of 2,000 kw. each, one of which is now disabled. Effective capacity at present is therefore 2,000 kw. • Estimated from incomplete information. POWER 221 Both the power production and the number of customers served by Empresa Electrica have increased gradually over the years for which figures are available. A generated output of 29,143,000 kilowatt hours was sold to 18,115 customers in 1940; by 1948, there were 30,010 users, taking 54,221,000 kilowatt hours. Although full figures for 1950 were not obtainable at the time of completion of the Mission's field work, customers are reported to number 34,314 with a total connected load of 44,993 kilowatts. A distribution of these users is shown in Table XXVIII. TABLE XXVIII CUSTOMERS AND CONNECTED LOAD OF EMPRESA ELECTRICA DE GUATEMALA, 1950 Stoves, Total Number of Lighting Lighting heaters and Motor connected customers residential municipal apparatus load load (kw. ) (kw.) (kw. ) (kw. ) (kw.) Guatemala City 14,204 553 19,010 8,593 42,360 31,117 Antigua 470 61 212 142 885 1,289 Escuintla 228 13 104 163 508 708 Palin 33 2 73 108 159 Amatitlan 205 6 166 448 825 638 Villa Nueva 88 6 8 205 307 403 Totals 15,228 641 19,500 9,624 44,993 34,314 The company estimates that its present capacity will be adequate for 1951 demands, which are not expected to exceed 16,760 kilowatts. For 1952, however, demand is anticipated at 17,950 kilowatts. To meet thi"s increase plans have been made to install an additional 2,500-kilowatt unit at the existing El Salto plant as soon as financial arrangements can be completed. Demand is expected to reach 19,370 kilowatts in 1953 and 20,700 kilowatts in 1954. Thus a further expansion of generating ca- pacity will be needed before 1954. Empresa Hidroelectrica del Estado Among publicly owned power companies the most impor- tant is Empresa Hidroelectrica del Estado. Created in 1940 by governmental decree, this semi-independent organization has the status of a General Directorate of the Ministry of Commu- nications and Public Works. It operates the Planta Nacional 222 THE ECONOMIC DEVELOPMENT OF GUATEMALA de Santa Marfa, a hydroelectric plant on the Samala River south of Quezaltenango. With a nominal installed capacity of 4,000 kilowatts, the Planta Nacional de Santa Maria is by far the largest publicly owned power plant in Guatemala. Average monthly sales for the first 10 months of 1949 were nearly 623,000 kilowatt hours (Table XXIX). Some 36 municipalities of varying size receive electricity from this source. By law the plant must furnish free power to the City of Quezaltenango, the amount of which is estimated at about 750 kilowatts. TABLE XXIX ENERGY FURNISHED BY PLANTA NACIONAL DE SANTA MARIA FIRST TEN MON THS OF 1949 Production January 1 to Average October 31, 1949 Service (kw.-hr.) Value k~~t:~ Official .................. 3,242,259 045,996.64 00.01418 Residential 1,498,393 40,021.73 0.02670 Industrial 1,486,813 13,434.34 0.00903 Total ........ 6,227,465 99,452.71 0.01597 The generating equipment of this hydroelectric plant con- sists of two units, each of 2,000-kilowatt capacity. A severe storm in October 1949 put one of these units out of commission. As a result, the plant was not in operation during the following month and since then its service has been limited to the capacity of the single remaining unit. Empresa Hidroelectrica del Estado is currently handicapped by an inadequate administrative and financial status. It is not operated as a separate entity under state ownership. Instead, the enterprise is required by law to turn in its income to the national treasury and to receive its funds through legislative appropriations. Free service to Quezaltenango of such a large part of its output aggravates its financial difficulties. Repairs to the damaged unit are proceeding very slowly, apparently for lack of funds. At the present rate of progress, it will be years before the full generating capacity is back in POWER 223 operation. Meanwhile, Quezaltenango and the rich surround- ing area are on reduced power rations. Figures for the unsatis- fied demand are not available, but the substantial shortage is readily evident from the Mission's inspection. Notwithstanding this situation, arrangements are being made to furnish additional power to various neighboring towns such as Coatepeque, Retalhuleu and Mazatenango, and to some of the large fincas in the area, such as Ingenio Palo Gordo and Chocola. Actually, any adequate supply to all of these locations from the Santa Maria plant appears out of the question prior to restoration of the second generating unit or construction of a new plant. Other Power Plants The next largest publicly owned hydroelectric plant is the 660-kilowatt Rio Hondo unit near Zacapa. Only one other, that at Retalhuleu, exceeds a 200 kw. capacity. Most of the remaining p~blicly owned power plants in Guatemala are small units of less than SO-kilowatt capacity, generally diesel powered. Many have been introduced during the past two years under a government electrification plan. Others have been installed by municipalities to supply local needs. A total of 71 plants of all sizes, some as small as two kilowatts, have been reported to the Mission as publicly owned, but the list is undoubtedly incomplete. Private plants, in sizes ranging from two kilowatts upwards, are numerous. Apart from those of the Empresa Electrica de Guatemala, some 40 such plants are reported to have capacities exceeding SO kilowatts; the largest ones are given in Table XXVII. Most of the private units, too, are diesel powered; notable exceptions are the steam plants of Palo Gordo and Los Cerritos and the hydroelectric installations of Cante! Mills, Chimalten·ango and Las Quebradas. · As a rule the private plants have been established to supply power for specific activities such as manufacturing (Cante! Mills and Los Cerritos), plywood (Las Quebradas), agricul- tural production (the United Fruit Company plants and Palo Gordo), or as stand-by sources for emergency use in case of 224 THE ECONOMIC DEVELOPMENT OF GUATEMALA failure of purchased power (Nortropic Company and British- American Tobacco Company). Others, however, such as the Chimaltenango and San Jose plants and those of Empresa Electrica de Guatemala, were built originally for the purpose of selling power to the public in areas where the demand was clearly apparent. 3. TRANSMISSION AND DISTRIBUTION Transmission of significant amounts of power for any appre- ciable distance is now limited to the Empresa Electrica de Guate- mala and the Planta Nacional de Santa Maria, both of which supply communities at some distance from their plants. Neither of these involves long lines in the ·accepted meaning of the term. Empresa Electrica transmits power from its outlying plants to the capital over a 66-kilo volt line originating at Escuintla and terminating at Guatemala City, with a branch to Antigua. Distribution lines carry from 2,300 to 13,200 volts. Additional transmission lines are planned to handle the increased load more economically and both the substations and distribution lines are being expanded to provide for a larger number of customers. Transmission of power from the Santa Maria plant of Empresa Hidroelectrica del Estato is over 22-kilovolt and SO-kilo- volt lines to municipal distribution systems, where it is stepped down to 2,300 volts, and thence to 220 volt supply lines. It is understood that the transmission lines to link other projected plants in the Government's program will be from 33 to 66 kilo- volt with distribution lines running from 2,400 to 12,470 volts. Other systems are of only locai importance. Distribution lines for the supply of local areas may be constructed by the communities themselves, or by the company which furnishes the power. Isolated customers are generally required to bear the cost of lines as a prerequisite to obtaining power. Since there are few large power plants outside the Guatemala City area and lines from these outlying fincas would be dispropor- tionately long and expensive, the small privately owned gen- erating plants now widely used on fincas probably furnish POWER 225 power more economically at present than would be the case if power were drawn from the more distant sources. So far as the Mission has been able to ascertain, no legal provision compels the interconnection of major plants for the purpose of interchange of power or emergency supply. At present this is not a serious matter, since all plants of the Empresa Electrica are interconnected and only a few other plants are large enough to operate effectively in a national network. Power losses and the high cost of constructing transmission lines (from @10,000 to @25,000 per mile) preclude the long distance tran smission of power in small quantities. However, when new large plants are put into service their interconnec- tion will become more important. There appears to be no national code of specifications for electrical installations, and unsafe and inadequate installations have been a source of complaint. Except for those plants and lines operated by the Government, standards for transmission, distribution and focal wiring appear to be left to the discretion of the company concerned or the local authorities. 4. RATES Guatemala has no central system of public utility regula- tion. Although the maximum rates which the Empresa Electrica de Guatemala may charge are stated in its contract with the Government, within these limitations the company fixes its own rates. The Minister of Communications and Public Works fixe s the rates of the Em presa H idro electrica del Estado, presum- ably on the recommendation of its manager. Rates of plants in other areas are fixed by their owners or managers. Under these circumstances there is very little apparent uniformity in charges, as may be seen from Table XXX, al- though exact comparison is impossible from available data. Lack of regulation has not, however, invariably resulted in high rates. One plant owner has offered to sell power cheaply for manufacturing purposes to attract industry to his area and provide a market for his surplus generating capacity. Sev- eral private and public power systems have established low 226 THE ECONOMIC DEVELOPMENT OF GUATEMALA flat rates for residential lighting purposes for low-income customers in their· areas. Sound rates must, of course, be based upon costs of produc- tion and distribution. Such costs-and consequently the rates based on them-will differ from one area to the next. Espe- cially high rates seem to exist in the seaports (San Jose and Puerto Barrios). Some of the rates in Chimaltenango are quite low. The San Jose and Chimaltenango plants, incident- ally, are under the same ownership. TABLE XXX SELECTED AVERAGE RATES FOR ELECTRIC SERVICE INVARIOUS LOCALITIES, 1950 Rate Type of service (per kw-hr) (monthly) GUATEMALA CITY, Residential, metered 00.0426 (Empresa Electrica Residential, flat rate 0.0393 de Guatemala; Commercial, metered 0.0503 privately owned) Commercial, flat rate 0.0490 Industrial 0.0230 Governmental 0.0249 Municipal 0.0246 PUERTO BARRIOS General average, 1950 0.0868 (International Rail- Metered, 1944 0.12 ways of Central Per 40 w. lamp 01.62 America; privately Per 60 w. lamp 1.95 owned) Per 100 w. lamp 3.25 Per 200 w. lamp 6.50 Qu£ZALTENANGO Residential, to 20 kw.-hr. 0.09 (Empresa Hidroelec- Residential, next 20 kw.-hr. 0.07 trica del Estado; Residential, over 40 kw.-hr. 0.05 publicly owned) Commercial, to 20 kw.-hr. 0.09 Commercial, next 20 kw.-hr. 0.o7 Commercial, over 40 kw.-hr. 0.05 Industrial, to 30 kw.-hr. 2.50 Industrial, next 20 kw.-hr. · 0.05 Industrial, over 50 kw.-hr. 0.02 Special, 50 w. lamp 0.50 CHIMALTENANGO Residential, ordinary 0.07 ( Small private Industrial 0.01-0.025 company) Municipal, 60 w. lamp 0.75 Special, 50 w. lamp 0.50 SAN JOSE Residential, up to : 0.18 ( Small private Commercial, up to: 0.12 company) HUEHUETENANGO Residential or commercial, (Municipally per 25 w. lamp 0.25 owned) Industrial, to 3 hp. 0.05 Municipal O.QlS 1 Rate per kilowatt hour, with one quetzal monthly minimum charge. • Special monthly rate for low-income group of customers. POWER 227 II. Factors Influencing Power Development 1. POTENTIAL POWER SOURCES • Logically, hydroelectric power generation should become an important element in the economic development of Guate- mala. The high elevation, steep drops, narrow valleys and heavy rainfall occurring in the highlands combine to give the country an appreciable hydroelectric potential near most of her active or promising centers of production. Seasonal distribution of rainfall, however, limits the poten- tial amounts of power to be derived from any seemingly good sites. Although there is an appreciable variation in rainfall be- tween districts, precipitation is generally heavy between June and November and very light from December to May. Such areas as the Salama Valley and the eastern Departments of Zacapa, Chiquimula and J utiapa, which are comparatively dry even during the normally wet months, suffer a material drop in stream flow during the dry season. In spite of the lack of local rainfall, however, streams in those areas having sources in the southern and western high- lands or in the north-central mountains are reported to main- tain a sufficient flow in the dry season to permit the generation of electric power on a reasonable scale. Similarly, the flat south coastal plain is said to have little or no rainfall during the dry season, but is watered by streams carrying a good dry-season flow from the mountains to the north; hence good hydroelectric sites are reported in the piedmont or lower levels of the highlands where these streams rise. One less fortunate area is the Peten. While low-head devel- opments might be possible along some of the rivers of this region, especially in the southern and southwestern portions, the prevailing flat terrain and the absence of streams of any magnitude in the interior tend to confirm the probable lack of practicable power sites. It should be pointed out, however, · that virtually no data on possible power sources in the Pete.n have been collected to date. 228 THE ECONOMIC DEVELOPMENT OF GUATEMALA Suggested Power Sites Many locations in various parts of the Republic have been proposed as 5ites for hydroelectric power generation. The potentials of some have been estimated roughly but few have had year-around flow measurement and none have been studied completely. The most definite sites on which the Mission was able to obtain information are listed in Table XXXI. Even these must be viewed with caution at the present stage. Others often discussed, but not well identified or evaluated, are located near Retalhuleu, Zacapa and Aquacatan, as well as on the Rio Platanos, Rio Madre Viejo and the upper Rio Motagua. A still more popular subject of debate is the Lake Atitlan site. TABLE XXXI HYDROELECTRIC SITES REPORTED FROM VARIOUS SOURCES, 1950 Reported potential Locations (kw) Remarks Palin1 2,500 (additional to present production) Jurun1 7,000 San Pedro1 1,140 Rio Esclavos 2,500 (or more) Rio Aguacapa 2,500 (or more) Rio Bobos 5,000 ( without storage reservoir) Rio Hondo 1,500 ( or more, including existing plant capacity of 660 kw.) Rio Cahab6n 1,200 (or more) Rio Samala (several sites)' 9,000 ( or more, including present capacity of Santa Maria plant) Santa Rosalia 2,000 Rio N ahualate 4,000 Rio Naranjo 5,400 Rio Cusulchima 3,000 Rio lxpil 2,000 Rio Maza 2,800 Rio Polochic 3,000 Rio Chilasco (near Salama) 2 2,000 Rio Salama• 4,000 Rio Tambor (near Zacapa) 1 4,000 1 Some long-term flow data available. • Studies of these sites on record. POWER 229 Lake Atitlan A proposal to use the waters of Lake Atitlan for the devel- opment of approximately 20,000 kilowatts has not been included in Table XXXI. There is considerable difference of opinion as to whether the project is a feasible one, with too little technical data available on which to base a sound conclusion. Lake Atitlan is a large body of water. Yet neither the total flow into it nor the losses by outflow, evaporation and leakage are known within reasonable limits of error. Without this information the effect upon the lake level of the heavy withdrawals contemplated for power generation cannot be pre- dicted. Moreover, the project calls for an outlet tunnel from the lake through unexplored subsurface formations and a series of power dams in locations whose geology remains similarly unexplored. This offers far too many unknown factors to accept the estimated cost of ~5,000,000. A good deal of tec,hnical study is required before serious consideration of this proposal can be justified. The project calls for additional competent geologic, hydrologic and other engineering information, all of which can be obtained without great difficulty or expense. La Fragua Despite the apparent possibilities of a combined power and irrigation project at La Fragua-an area possessing many attractive features, such accessibility by rail and road and settlement by an enterprising and progressive element of the population-the Mission is not in a position to make a positive recommendation on the initiation of a power project there. It has been pointed out in Chapter II that data on the quality of soils is not sufficient to be conclusive on the irrigation aspect. Data on power potentialities is also deficient and inconclusive. For instance, despite the fact that studies have been made by the J. G. White Engineering Corporation and others, reports received by this Mission indicate that data on stream flow and rainfall are not adequate. Indications point to a material drop in stream flow during the dry season. Before undertaking an 230 THE ECONOMIC DEVELOPMENT OF GUATEMALA investment that was estimated in 1927 at upwards of $1,300,000 and which would involve more than double that figure today, it is clear that much more definite, reliable and continuous data would have to be collected. 2. AVAILABILITY OF TECHNICAL DATA Lack of comprehensive and reliable data on stream flow constitutes the principal difficulty in evaluating hydroelectric power potentials. A similar deficiency exists in rainfall data for areas whose run-off feeds power streams, although the National Observatory maintains some rainfall data and is understood to be increasing its coverage. In the Mission's study of numerous proposed power projects, this lack has been all too evident. Seldom does the information received indicate that enough data have been collected, over a period of years and at critical seasons of the year, to show the minimum dependable flow of the streams or the rainfall and run-off of their watersheds. Most of these projects have been developed on the strength of a few measurements, made over such brief periods that they could not have produced dependable information on which to base heavy investments. This is true even in the Zacapa and Salama areas and on the south slopes of the main Cordillera, where studies on both irrigation and power development have been carried on. In justice it should be mentioned that there are exceptions. In the general vicinity of Guatemala City several good power streams have been investigated, the majority flowing down the steep slopes of the Escuintla-Guilapa area through the Departments of Santa Rosa and Escuintla. Both the Ministry of Communications and Public Works and private companies have shown interest in power development here. Reports indicate that, in at least some of these cases, flow data have been taken over a period sufficient to establish the character- istics of the streams. 3. SPECIALIZED PERsONNEL There are excellent engineers in Guatemala, but their number is very small. The country is fortunate in that those POWER 231 in key governmental positions concerned with electric power are qualified to understand both the technical requirements and the present deficiencies in data. These few cannot, how- ever, be expected to do the whole job. Additional technically trained personnel are urgently needed to make basic initial field studies, design power plants, and supervise their actual construction and operation. Neither the recommendations of this report, nor any appreciable ex- pansion of power facilities, can be carried out unless enough properly trained men are secured for the purpose. Action should be taken by the Government to remedy this situation through increases in educational opportunities, on-the-job practical training, and temporary employment of foreign engineers where properly qualified Guatemalans are not obtainable to fill essential positions. 4. PLANNING Although there is no over-all government control of the electric power industry, such matters relating to it as may fall within the Government's activities are under the juris- diction of the Ministry of Communications and Public Works. Among the functions of this Ministry are the collection of data on power, general planning of government power projects, review of other such projects and proposals in which the Government has an interest or for which governmental aid or concession is sought, and control of the Empresa Hidro- electrica del Estado. Only very recently has any effort been made toward a national program for orderly development of power resources. Projects advocated or constructed in the past (with the ex- ception of those of Empresa Electrica de Guatemala and that for improving the Planta Nacional de Santa Maria) appear to have been based upon narrow local needs or else pure con- jecture as to future power markets. The Ministry is now discussing plans for coordination and integration of power production, both public and private. Meanwhile a program for construction of several governmental power plants of moderate size is under study. In the absence 232 THE ECONOMIC DEVELOPMENT OF GUATEMALA of sound data, it is understood that the Ministry has esti- mated regional requirements on the basis of population- density, of opinion as to economic potential, and of observed opportunities for building hydroelectric projects at reasonable cost. In this contemplated program the Ministry of Communi- cations and Public Works has included six projects, to serve every part of the Republic except the most thinly populated and unexplored regions. For initial execution, five of these hydroelectric projects total 11,200 kilowatts; at a later stage, all six would total 49,000 kilowatts. Individually, they are: (1) Rio Esclavos: one plant to serve the Departments of Santa Rosa, J utiapa, and the southern part of Escu- intla; 2,000 kw. (2) Rio Hondo: expansion of the plant near Zacapa to serve the Departments of Chiquimula, Zacapa, Pro- greso and part of Jalapa; 1,500 kw. initally, to be expanded to 3,500 kw. later. (3) Rio Bobos: one plant to serve the Department of Izabal; 1,500 kw. (4) Rio Cahab6n: one plant to serve the Department of Alta Verepaz; 1,200 kw. initially, to be expanded to 2,000 kw. later. (5) Rio Samala: two plants (one new) to serve the De- partments of Quezaltenango, Huehuetenango, and part of Suchitepequez; 5,000 kw. initially, to be expanded to 10,000 kw. later. (6) Unspecified plants to serve the Departments of Guate- mala, Sacatepequez, and parts of Escuintla, Chimal- tenango and Suchitepequez; to 30,000 kw. in reasonable future. To the extent that it has been possible to judge a few of these locations in the absence of concrete data, it appears that the Ministry is approaching the question with caution. Without endorsing these specific projects, the Mission ob- serves that most of the projected capacities-for the initial stage, at least-seems to be estimated conservatively. POWER 233 III. Recommended Policies and Projects Recommendation No. 57: Establish an autonomus National Power Authority: 1) to plan and supervise an integrated progr~m of power development; 2) to construct and operate publicly owned power facilities. A recommendation to establish a National Power Authority is no criticism of the efforts of the present agencies active in this field. Rather, it is recognized that these efforts should be reinforced in order that the work of several specialized groups can be unified toward a single broad objective. The Mission believes that the appropriate officials are conscious of the need for improvement, coordination and con- trol in the development and utilization of the nation's power resources. But the establishment of more definite administra- tive machinery, with powers and duties officially prescribed, is essential if any continuous planning and coordination of this kind is to be effective. Precedent Other nations have found this step increasingly necessary as industry has developed and as efforts to raise the standard of living in undeveloped areas have been intensified. The Republic of Mexico, for example, faced much the same prob- lems as now face Guatemala. Mexico reached a satisfactory solution through the estab- lishment of a set of three related governmental organizations dealing with electric power: (a) the Federal Electricity Com.: mission; (b) the National Commission ori Rates; and ( c) the Directorate General of Electricity. Each of these performs an essential function. Briefly, the Electricity Commission plans the "national network"; designs, constructs and operates government-owned plants; .and coordinates the integration of private plants into the national program. It is a semi-autono- m_o us body operating under a Board of Directors, but re- sponsible to the President of the Republic. The National Commission on Rates is a neutral Commission for the purpose 234 THE ECONOMIC DEVELOPMENT OF GUATEMALA of reviewing, adjudicating and prescribing rates or charges. It also operates on a semi-autonomous basis, although its decisions are subject to review and veto by the Minister of Economy. The Directorate General of Electricity is a purely governmental authority which, among other duties, undertakes inspection and enforcement of regulations and rates. Suggested Mechanism While Guatemala probably does not need such a large or elaborate organization as that of Mexico, adoption of a generally similar system of coordination and control would appear distinctly advisable. The technical aspects of planning, programming and coordinating could well be performed by the autonomous National Power Authority. This agency should not restrict its interest to government-owned plants, but should examine all proposed new projects to determine whether they conform to the national long-term development plan. It should conduct a continuing study of facilities and requirements and aim towards the eventual integration of a national network of public and private electric power. Supervision of actual design and construction of govern- ment-owned plants would also be a proper function of the National Power Authority, perhaps utilizing the existing engineering and construction organization of the Direcci6n Gen- eral of Public Works. Operation, maintenance and management of government plants, including their fThancial management, should be a function of the new authority, the nucleus of which would be the existing Empresa Hidroelectrica del Estado. The present Directorate General of Electricity would remain as the authority in charge of administrative duties of regulation, in- spection and enforcement, in such fields as safety precautions, rates and standards of service, among others. Rate Regulation In all phases of power production it would be desirable to provide for review of rates and services by a neutral com- mission empowered to judge, prescribe and modify them. POWER 235 Rates for electric power are of importance both to the customer and the seller. In privately owned plants, the neces- sity for earning operating and maintenance costs plus amorti- zation and a fair return on the investment, on the one hand, and the desire of the customer to purchase electric energy at reasonable rates, on the other, are not necessarily incompatible. Yet, unless rates are subjected to some form of neutral adjudi- cation and control, conflicts of interests are almost inevitable. Government-owned and -operated plants also need rate supervision and control, although not for the same reasons. Their rates are not subject to the profit motive; but they are susceptible to unwarranted fluctuations stemming from politi- cal pressures, because of the constant public demand for cheaper power or the desire of some officials to use public in- come from power to offset losses elsewhere. Under these pres- sures rates may be set either too low to permit efficient opera- tion, maintenance and expansion, or too high for the service actually rendered. The Public Utilities Commission already proposed by the Mission (Chapter V, Recommendation No. 30) would be the logical entity for regulation of these rates. Such a Commission, composed of carefully selected nonpolitical members, could go far toward the elimination of the various controversies now existing in the electric power field. Technical Data One of the most important aspects of a coordinated power program should be the assembly of basic technical data nec- essary for sound development. This should be the responsi- bility of the National Power Authority. Records should be kept of consumer loads, sales, unfilled demands for service and similar market data. Information on local rainfall, stream flow and related data should be asselllbled from all other agencies which may be obtaining such records for their own purposes. Wherever feasible, these other agen- cies should be encouraged (with transfers of funds, if neces- sary) to enlarge their systems of measurement and collection 236 THE ECONOMIC DEVELOPMENT OF GUATEMALA of data. Full use of such agencies should be made before contemplating duplicate efforts; but if adequate data cannot be secured in this way, the Ministry should create a staff to fill in the missing parts. Empresa Hidroelectrica del Estado The Mission believes that many of the present difficulties of the Empresa Hidroelectrica del Estado exist because the or- ganization is not now constituted to operate on ·a businesslike basis. No enterprise of t~is kind can expect to succeed if it does not have sufficient authority over its own operations. As a part of the new Power Authority the Empresa would function as an operating unit of an autonomous corporation under government ownership. This would allow it to retain, for its own management and proper use, revenues from the sale of its power at rates fixed by the Public Utilities Com- mission. It would allow the management to apply the funds to maintenance, operation and expansion of facilities, and to the establishment of new facilities within the authorized gov- ernmental program. Under the new organization, normal expansion should be met out of income. In the immediate future, however, the Government might desire to proceed with new plant con- struction at a rate faster than the earnings could finance. This would require borrowing. The new authority could well be created out of the old Empresa. Although the present organization is small, it can be expanded gradually as properly qualified personnel are found. This action would take full advantage of the existing organi- zation and the experience of the officials now managing the enterprise. Such a course is infinitely preferable to the estab- lishment of a new and completely untried body. Recommendation No. 58: Consider private investment in power production as a complement to power development under public ownership. POWER 237 Under present circumstances in Guatemala, there seems to be a field for both public and private ownership in electric power development. As it is, private capital already hesitates to enter entirely new ventures, even with a reasonably assured market. This characteristic would naturally be expected to be accentuated in the case of power projects for undeveloped regions. Hence, where power production is proposed as a step in development of new areas, without reasonable assurance of the early estab- lishment of industrial enterprises or other power-consuming activities, it is clear that the Government may have to finance the power development projects or at least give them financial assistance. In certain other regions-developed or not-the Govern- ment may wish to retain full control of power production for other reasons. This may well be true of the Samala River or Lake Atitlan, for example, or in various other localities where power development might be only one aspect of a broader government development program. On the other hand, where electric power has long been produced and there are records of sales growth and unfilled demands for service, new power market potentials can be estimated by projection of past trends. Thus, as in the case of Empresa Electrica de Guatemala, private capital can be induced to invest with greater assurance of a return. In these instances every quetzal of private investment in electric power produc- tion at the present time represents an equivalent amount of public funds free for investment elsewhere. For this same reason nationalization of the Empresa Elec- trica de Guatemala-frequently discussed and rumored unof- ficially-would, in the opinion of the Mission, be inadvisable. The value of the fixed assets (several million quetzales) for which the Government would become obligated to the present owners in such a move would involve an unnecessary drain on public funds, at a time when the Government is confronted with many more urgent uses for its limited capital. The Mission believes, therefore, that in addition to its own power projects the Government should avail itself of the 238 THE ECONOMIC DEVELOPMENT OF GUATEMALA support of private power companies. These companies should, of course, be required to conform to the national plan for power development and integration (when such a plan exists), and should also come under the impartial rate jurisdiction of the Public Utilities Commission as elsewhere recommended. Assistance in power development from sound private com- panies could be more easily obtained if the Government were to consider guarantees of loans for the purchase of new equipment. Governmental competition for retail customers in areas served by such companies should be avoided. H excess power were available from government-owned plants nearby, it could be sold wholesale to local power companies at slightly reduced rates; the cost of its retail distribution could be borne by the private companies, who would sell it through their own systems at prescribed rates. Recommendation No. 59: Give immediate aid to alleviation of present or im- pending power shortages in Quezaltenango and Guatemala City. Quezaltenango Situation Quezaltenango and the surrounding communities depend for their power upon the government-owned Planta Nacional de Santa Maria. Reference has already been made to the flood damage to this plant in 1949, as a result of which its former capacity of 4,000 kilowatts has been reduced to no more than 2,000 kilowatts. Precise figures for the extent of unfilled demand in the area apparently do not exist. One government estimate claims a deficiency of 8,000 kilowatts, which is much higher than can be supported by any evidence available to the Mission. That there is a definite shortage is, however, undeniable. In ad- dition to the area now served inadequately, numerous other municipalities are awaiting connection to the Santa Maria plant. · In any event, an immediate attempt to provide another 8,000 kilowatt capacity is not recommended. But the Govern- POWER 239 ment is urged to restore to its original capacity the Planta Nacional de Santa Maria, either by repair of the damaged unit or installation of a new one. Repair of the present unit would cost approximately ~300,000, according to Empresa Hidroelectrica; this would be a small outlay to obtain another 2,000 kilowatt capacity. In addition to repairing the damaged generating unit, however, an engineering study should be made of the site of the Santa Maria plant and the stream from which it derives its power, to estimate the feasibility and cost of protecting the pfant from future flood damage. The cost of such works might make it advisable to repair the damaged unit as a temporary measure, without additional flood protection, and to construct another plant of around 2,500 kilowatt capacity at a safer site (probably at La Dieha). This would supplement the production of the Santa Maria plant and provide some ·p rotection to customers in case of further damage to the main plant. The cost of a new plant cannot be estimated accurately without more ·information, but it is believed that one of 2,500 kilowatt capacity should · run between ~650,000 and ~900,000. Guatemala City Situation Studies of the Empresa Electrica indicate that, with present generating capacity, Guatemala City will have a power short- age by 1952. The company plans to install an additional unit of 2,500 kilowatt capacity in its El Salta plant and to add 665 kilowatts at its San Luis plant. This, it estimates, will provide enough power to meet prospective demands until about 1954 or 1955. Estimated cost of expanding the El Salta plant, together with corresponding improvements in the transmission and distribution system, has been reported by the company as approximately ~2,610,000. About ~1,496,000 of this is for materials and equipment to be obtained outside. Guatemala. Rising costs of materials, equipment and labor may well have increased these estimates since the company's report was prepared. It is understood that the company is now at- 240 THE ECONOMIC DEVELOPMENT OF GUATEMALA tempting to negotiate a loan for a part of the above amount and that a government guarantee is required for this purpose. In view of the urgency of the situation, it would appear advisable for the Government to assist the company as re- quested. The present value of the fixed assets of the company and its record of earnings indicate that the Government would not be assuming any material risk in backing its effort to obtain a loan. It is recommended that a prompt decision be made. Furthermore, in view of the time required for procurement of equipment and materials and for power plants and the increasing difficulty in obtaining delivery because of defense production needs, the Government should move promptly in taking whatever action may be necessary to insure that the indicated power requirements of the Guatemala City area for 1954 or 1955 will be met satisfactorily. Recommendation No. 60: Until proper data are available, limit new govern- ment electric power investments to emergency measures and small local plants. Pending the collection of adequate technical and economic information, any installation or expansion of large power plants should be restricted to localities where definite and immediate power shortages exist and where engineering data are at hand, as in the Guatelmala City and Quezaltenango areas. Even if technical data were available, construction of large power plants elsewhere for the sole purpose of en- couraging industrial development, without assurance of an early market for the power, does not appear justified at this time. This recommendation is made in the hope of averting a possible waste of funds, which might easily result from the construction of large electric power plants without the bene- fit of long-range engineering data on which to determine the design. It should be recognized that a basic determination of assured capacity from a power stream, without a costly im- POWER 241 pounding dam and resevoir, must conform to the minimum dependable flow of the stream. This, in turn, depends on rainfall and run-off, both of which vary from site to site and season to season. Observations and collection of data must, therefore, extend over a number of years sufficient to establish with reasonable certainty the characteristics of the site, the stream and the watershed. A period of at least five years should be adopted as a minimum; data obtained for a longer period are preferable. No project should be considered for construction or for financing unless based on such data. Small Units The present program of government installation of small power plants in towns and outlying areas is an important development and should be continued as an interim measure. Collectively these plants will cost more to operate than a few larger plants of equivalent total capacity and will often require importation of diesel fuel; but the scattered locations and small sizes of the communities involved warrant this type of installation at the present time. This plan has the advantage of flexibility and of low first cost per unit, as opposed to the much higher cost of construction of large plants and transmission lines to supply the same areas and populations. Each plant installed should be large enough to allow for a reasonable expansion in local service before its maximum capacity is reached. Interconnection of small plants in adja- cent localities should be provided for, with one plant in the area sufficiently large to permit the eventual shut-down of the others except for emergency operation. When superseded by a supply of power from a regional network of larger plants, many of these small plants would still be in good enough condition to be moved to other areas for a continuation of the development program. Meanwhile, their use would afford time and opportunity for the collection of the economic and technical data needed ih developing the major national elec- trification program. Training of operators can be carried on at existing plants rapidly enough to satisfy a conservative installation rate. 242 THE ECONOMIC DEVELOPMENT OF GUATEMALA IV. Priorities and Expenditures Priorities Most of the Mission's recommendations concerning electric power are, at this stage, matters of policy rather than ex- penditure. Those involving major government investment- apart from continuation of the small diesel plant program- are the restoration of the Planta Nacional de Santa Maria, construction of its auxiliary plant if indicated, and possible assistance in financing the expansion of the El Salto plant. As all of the recommendations are considered of equal importance and urgency, and since the total expenditure is comparatively modest, it is suggested that all be given equal priority. Costs Preliminary estimates of costs of hydroelectric work, even when based on detailed surveys, are subject to changes be- cause of variations in conditions and prices in the long time between estimating and executing the projects. Without de- tailed surveys, the best that can be done is to approximate the costs, using the experience of other operations of a generally similar nature. The Mission has employed this method except where more reliable estimates could be quoted. It should be understood, however, that such approxima- tions are useful only as guides. Power plant costs show wide variation. Hydroelectric plants in the United States, for example, were reported by the Federal Power Commission in 1939 to cost from 095 to 0479 per kilowatt installed, while steam plants are reported from other sources to range from 0150 to 0400, and diesel plants from 0100 to 0350 per kilo- watt installed. Costs of operation vary widely with size of plant, numbers and types of employees, wage scales, skill of employees, efficiency of design and numerous other factors. Average costs of operation of steam plants are higher than those of diesel plants; diesel costs, in turn, exceed those of hydro plants of like capacity. Based upon information available, it is estimated that repairs to the Planta Nacional de Santa Maria would cost POWER 243 about @300,000; a plant at, say, La Dicha, to supplement it as suggested, would involve approximately @900,000; expan- sion of the El Saito plant and auxiliaries has been estimated at about @2,610,000, but this is a private venture and the extent of any possible government assistance is undeter- mined; there are also undeterminec1 costs for whatever small diesel plants may be installed, as well as certain expenses for recommended organizational changes and collection of data. In Chapter X the proposed program of additional invest- ment in the field of power maks provision only for the cost of new projects and assumes that expenditures on Santa Maria, El Saito (if any), and small diesel plants will continue to be met from the normal budgetary appropriations.  CHAPTER VIII Public Policies Affecting Development Studies and recommendations for development in specific fields of agriculture, indt!stry, mining, transportation, com- munications and power are of doubtful usefulness unless ac- companied by an examination of the public policies under which these developments are expected to take place. Thus, despite the fact that studies of certain broad policies were not set out as specific objectives of the Mission, these cannot be divorced from the subjects of the preceding chapters. For example, from a practical point of view it is useless to talk of developing the agriculture of the rich Pacific coast without dealing with malaria control and public health policies. Accordingly the Mission offers in the present chapter a limited number of recommendations in matters of organiza- tion and public policy whose fundamental importance to national development in other fields cannot be ignored. 1. COORDINATION OF EFJ'ORT A major problem of the Government at present is the excessive duplication, overlapping and even competition which exists in various agencies in the economic and social field. In practice, of course, this cannot be entirely avoided, for the functions of different economic institutions have many points of similarity. It is also difficult to eliminate completely certain rivalries, especially those which may have political origins. But in Guatemala the lack of co~rdination is par- ticularly noticeable and has sometimes endangered the success of useful economic policies. In view of the general shortage of trained personnel, an effective working relationship between various ministries and autonomous institutions which possess such talent would be invaluable in formulating and carrying out overall policies. As an example, close cooperation between the best technicians of INFOP, the Bank of Guatemala, the Technical Council of the Ministry of Economy and Labor, and the subdivisions 244 PUBLIC POLICIES AFFECTING DEVELOPMENT 245 of this ministry would be of great value in working out the details of a comprehensive investment program and studying the effects of its application. In more specialized fields, the lack of coordination is even more apparent. This is true of agricultural research and development, in which the following agencies are active: ( 1) the Ministry of Agriculture, with its various subdivisions; (2) the lnstituto Agropecuario Nacional (now loosely attached to INFOP); (3) INFOP itself, with its two experimental farms; (4) the Fincas Nacional e lntervenidas; and (5) the Ministry of Communications and Public Works, now respon- sible for irrigation. A recent law has added a newcomer to the field, the proposed National Coffee Institute, charged with responsibility for "improvement of coffee production and the industry in its different phases." The National Mortgage Bank, its autonomous Department for the Promotion of Cooperatives, and lNFOP are all con- cerned with industrial and agricultural credit. Responsibilities do not seem to be clearly divided between them. Two new State banks, the Industrial Bank and the Labor Bank, are now being proposed to add to the already confused state of affairs. In such fields as public health and education, which are equally important for development, similar specific examples could be found. If the situation is to be corrected, policy decisions should not be left to the initiative of isolated departments or agencies. Judgement at the policy level, on almost all matters of economic significance, requires impartial, highly competent, and expert advice. While in some fields ( e.g., on monetary matters) pro- vision for such assistance is already made, in most others there is no mechanism to arbitrate between the many political, economic and bureaucratic interests in arriving at an objective decision. · Recommendation No. 61: Constitute a section of the Cabinet as a "Committee on Economic Policy", with the President of the Republic as chairman, to decide all matters of economic significance. 246 THE ECONOMIC DEVELOPMENT OF GUATEMALA Decisions on matters of national policy which have import- ant economic sign,ificance are, among all functions of the Government, those which require the greatest wealth of varied information. Also, in view of the complex repercussions of any single measure, they demand a wide exchange of compe- tent opinion. For this reason, it is important that such deci- sions be taken only after full discussion at the Cabinet level, aided as much as possible by a first-class staff. To insure a sufficiently broad but businesslike discussion of these issues, the Mission suggests their submission to a committee of Cabinet Members, to be known as the "Commit- tee on Economic Policy". This Committee would be under the chairmanship of the President of the Republic, and include as members the Ministers of Economy and Labor, Treasury, Agriculture, Health, and Communications and Public Works. The President of the Bank of Guatemala and the General Manager of INFOP should participate in the discussions. On the working level the Committee would be assisted by a staff of its own, headed by an executive secretary of the highest ability. The remuneration offered should ensure attractiveness, independence, and prestige for the position. The executive secretary, responsible to the President of the Republic, would hire his own small staff and would have to utilize, coordinate and perhaps often initiate the economic studies and planning work done in the various ministries or autonomous institutions. This would assist in the better utili- zation of trained technical personnel and would help to keep down the staff of the proposed Committee to a few highly competent individuals. Full cooperation of all Committee members responsible for existing agencies would, of course, be required. The duties of the secretariat could be outlined as follows: (1) Act as advisors to the President and the Committee. (2) Amplify a broad six-year plan of economic and social development-along the lines proposed by this Mission -as well as more specific one-year programs. These would be submitted to the President of the Republic and to the Cabinet for discussion and decision. Each PUBLIC POLICIES AFFECTING DEVELOPMENT 247 one-year program should be prepared early enough to serve as a basis for the government budget. (3) Study the progress of the six-year plan and the one- year programs, and bring failures and inconsistencies to the attention of the Committee on Economic Policy for reference to the ministries and autonomous agencies concerned. ( 4) Prepare suggestions for specific cooperation between the various ministries and autonomous agencies of the state, to prevent waste through d11plication of efforts. • (5) Review, at the req1Jest of the President of the Republic, drafts of laws, decrees and projects on matters of economic policy which are to be considered and pre- pare substantiated opinions to aid the President and Cabinet in making final decisions. (6) Take the initiative in organizing the necessary studies and research projects in the economic or social fields to be undertaken by other agencies or by individual experts, Guatemalan or foreign. (7) Keep continuously informed on the national economy, its trends and requirements, and its relations to the world economy. R ecommendation No. 62: Preserve INFOP as a permanent, nonpolitical insti- tution with the main responsibility for developing production. Creation of the Instituto de Fomento de la Producci6n was an effort to organize a single agency capable of tackling the concrete task of increasing industrial and agricultural pro- duction. It has been given the greatest possible freedom from the handicaps which often limit the effectiveness of public administration. In its organic law of July 29, 1948, INFOP was conceived as both a bank, subject to the general Banking Law, and as an institution that would take the initiative to increase and diversify national production in fields where private entre-  248 THE ECONOMIC DEVELOPMENT OF GUATEMALA preneurs were inactive. It is authorized to initiate studies, make loans, invest in enterprises and even to undertake direct operations in certain cases. Experience has shown the value of such developmental institutions where the direction can remain stable over a period of years, regardless of political changes. Such an institute can constitute a center of long-term economic programming. It can deal with problems which are more varied, more concrete and probably reach farther into the future than those which • have been tradition.lly handled by a central bank. It can pioneer in fields too new, too risky, or requiring too heavy capital investment to be successfully cultivated by private initiative. It can attract private savings and also serve as a convenient intermediary for foreign financing. The administrative autonomy, financial independence and nonpolitical character of INFOP are the raison d'etre of the institution and the key to its success. Such features should be carefully preserved by any government truly concerned with economic development in the country. Essentially, this means that the Government should pay its annual contributions to the Institute with regularity (which is not done at present) and that all staff appointments should be made on the basis of competence alone. If these policies are pursued firmly, INFOP may soon gain a professional prestige and nonpartisan recognition equal to that now enjoyed by most Latin American central banks. Once this is achieved, it will be a great step towards continuity and effectiveness in development policy. To make a general judgment of INFOP's activities at this stage would be premature. The organization is still in its initial trial-and-error period. It might be possible to question the distribution of its investments, or the wisdom of a few of them made without adequate prior study. If some of INFOP's activities have not been entirely successful, this is only to be expected in any new organization. The institution needs more time and continued support to show its full value. In many different fields INFOP has already demonstrated its usefulness. This is especially true of its loans to agri- culture, the seed improvement program, experiments in cotton PUBLIC POLICIES AFFECTING DEVELOPMENT 249 and mechanized cultivation, the grain elevator project ( even though it has been delayed), and several studies such as the preparation of soil maps and surveys. These are but a few that could be mentioned. The fact that the continuation of the valuable work of the Instituto Agropecuario Nacional is being made possible through INFOP's independent funds and man- agement is a further illustration of INFOP's utility. The Mission views with some concern proposals for the creation of an Industrial Bank and a Labor Bank. Existing agencies can be adapted without creating new institutions which would compete with older ones for talent and for funds, both of which are scarce. The Industrial Bank would certainly be at least a partial duplication of INFOP. The Labor Bank would duplicate not only INFOP but the Credito Hipotecario Nacional (Monte de Piedad) and the Guatemalan In_stitute of Social Security. The idea of gradual accumulation of the severance pay required under the Labor Code through regular monthly deposits of the employers (which appears to be the basis of the proposed Labor Bank) could-if it were sound-be fully realized within the savings account system of INFOP without creating an entirely new bank. Under present conditions in Guatemala, it seems that a single institution can, with flexibility and a minimum of administrative overhead, husband scarce resources within the whole field of national production to meet the changing needs of a growing economy. 2. CONTROLS AND RESTRICTIONS Recommendation No. 63: Review present export and price control policies whose possible benefit may be offset by their harm to production. Price control is one of the most delicate and potentially dangerous devices of economic policy. If the agencies charged with price fixing are not sufficiently acquainted with actual production costs and if the price policy is · not sufficiently 250 THE ECONOMIC DEVELOPMENT OF GUATEMALA flexible, prices may be kept so low that production will be discouraged. This has happened before in many countries. It seems probable that ceiling prices on some commodities have had a similar effect in Guatemala. There are indications, for example, that many more cattle would be raised if prices were more attractive. While this might result in higher domestic prices of meat for a short period, the larger supplies could be expected to bring about lower prices after a reason- able time. As to corn, beans and rice, the ceiling prices would have had a more unfavorable effect on production if they had actually been widely enforced. Decline of cacao production may be ascribed at least partly to the ceiling prices and export restrictions, presumably im- posed in the interest of a small domestic processing industry; without these controls, prospects for increased production and resumption of exports would undoubtedly be much more favorable. In some instances, imports by the Government of normally protected commodities (such as corn and rice) and their ·sale at less than cost prices also may have had a dis- couraging effect on domestic producers. While it is impossible under present world conditions to make a flat recommendation against all price controls, it is clear that the policy of imposing controls-particularly on agricultural goods domestically produced-should be exercised only with the utmost caution. Recommendation No. 64: A void excessive protection of national manufac- turing industries. Guatemala has no acute need to build up manufacturing to absorb manpower which otherwise would be hopelessly unem- ployed. In many fields there is an actual shortage of workers. Fortunately, there is ample room in the Republic for additional and more remunerative employment in the agri- cultural, forestry and mining industries, if conditions favorable to their growth are created. There is no reason to assume that manufacturing is preferable to extractive industries under PUBLIC POLICIES AFFECTING DEVELOPMENT 251 all circumstances. A corn, rice or cotton farm, with progressive management, alert workers and adequate equipment, will meet a more important need of the national economy than many a manufacturing industry which might be selected. It will be able to pay higher real wages than, say, a metal goods factory which may be hampered by an insufficient market, small-scale production, obsolete equipment and consequent high production costs; for the latter may need protection or outright state subsidies at the expense of the public in order to survive and even then will give only precarious employment to a comparatively small number of people. Conditions for a healthy growth of industries have been analyzed in Chapter III. Apart from this, by · reason of geography and geology, agriculture will remain the principal basis of the national economy for a long time. Agriculture will continue to make the largest single contribution to the national treasury and raw materials and purchasing power derived from farm activities will determine the future of manufacturing and commercial enterprises within the country. High-cost manufacturing industries should not be encouraged to such an extent that they increase the cost of agriculture or mining production, for this would affect unfavorably both the living standards of the majority of the people and the competitive position of Guatemalan exports on the world market. Guatemala's economic policy in the past several years has not always conformed to these principles. It is the impression of the Mission that import restrictions and prohibitions, which seem to be the principal instruments of protection used rather than high tariffs, have often been decreed by the Government without adequate study of the effects such measures might have. Excessive protection helps to maintain the high cost of antiquated industries at the expense of consumers. Future protective measures should, therefore, be dependent upon a reasonable prospect that within a relatively short time the domestic industry will become efficient enough to stand on its own feet and meet outside competition. Tariffs and import prohibitions should be instituted_:if at all-only after the • 252 THE ECONOMIC DEVELOPMENT OF GUATEMALA Government has satisfied itself that the domestic production can meet consumers' needs, not only in quantity but also in quality and price. 3. PUBLIC ENTERPRISE Recommendation No 65: • Reserve government funds for urgent public proj- ects, and employ them only in essential fields which cannot be covered adequately by private enterprise. A country ~ith strictly limited financial resources like Guatemala cannot afford to commit public funds to tasks which could be financed equally well by private capital. For this reason, the Government should undertake production and distribution only in instances of clear public need which can- not be met by private management and private capital. Production of Goods It is doubtful whether such conditions of need apply, for instance, to a current project for a government-sponsored shoe factory to supply cheap shoes to the Armed Forces. school children and the Indian population. This project has been planned by the Ministry of Economy and Labor, which sug- gests that at least partial financing of such a factory would be undertaken by INFOP and the Ministry of National De- fense. Action on the project might better be suspended until there has been time to ascertain if the need cannot be met by modern, large-scale mechanized shoe production financed and operated by private interests. Tourism The increase in foreign tourist trade which Guatemala has enjoyed since World War II has largely been due to the development of international air transportation. Much still remains to be done and some of the essential activities can be undertaken only by the Government. For example, some con- trol of the rates of hotels, boarding houses, tourist agencies and transportation facilities would seem to fall within the PUBLIC POLICIES AFFECTING DEVELOPMENT 253 scope of the Directorate General of Commerce, Industries and Controls. The promotion of the autonomous Indian industries, already undertaken by the National Indian Insti- tute in its artistic aspects, should receive the attention of INFOP for its financial needs. In the important field of high- way construction, development of tourism should be one of the primary aims of public policy. But the Mission feels that the formation of a National Tour- ist Corporation, which is now being proposed by the Ministry of Economy and Labor, is no panacea. There are two major problems hindering tourism in Guatemala: tourist travel is relatively expensive in comparison with Mexico and other Latin American countries; and the bad highways which impede travel to many places of achaeological, historical or scenic interest. Neither of these problems would be solved by crea- tion of a National Tourist Corporation. According to the project of the Ministry of Economy and Labor (Art. 70-j), one of the "obligations" of the proposed Corporation is "to plan and create the network of hotels and tourist camps in the Republic, by means of its own capital or with the contribution of the capital of third parties". The country has a number of adequate hotels, not only in Guate- mala City but also in such places an Antigua, Panajachel, Chichicastenango, Quezeltenango, and Huehuetenango. The present volume of business of most of these hotels is far from satisfactory. It is quite true that better hotels will be required in many other towns, but there is little doubt that stich hotels will be bulit by _ private interests as soon as demand makes them economically feasible. Such demand will almost automatically develop with the opening of the section of the Pan American Highway connect- ing Guatemala with Mexico. This will bring larger numbers of Mexican, United States and Canadian tourists into Guate- mala, and will make the building of auto courts and tourist hotels in some parts of western Guatemala an attractive private business venture. Any limited additional financing which might still be required could be undertaken by INFOP or the Credito Hipotecario Nacional. 254 THE ECONOMIC DEVELOPMENT OF GUATEMALA Taking into consideration the experience of other countries, both in Latin America and Europe, the Mission has been unable to find reasons to recommend the building and operation of hotels in Guatemala under the responsibility of a government agency. The remarkable development of the tourist industry in Mexico in the past 10 years has shown clearly what spon- taneous development can take place with adequate transporta- tion facilities, simple immigration and customs formalities, and reasonably stable political conditions. As far as tourist publicity is concerned, the project of the Ministry of Economy requires the proposed Corporation "to promote, encourage and carry out the tourist propaganda of Guatemala in foreign countries" (Art. 67-c). But Guatemala already has a National Tourist Commission which has had this function for a number of years. Meanwhile the transporta- tion companies interested in carrying passengers to and from Guatemala have done a very efficient publicity job entirely at their own expense, including intensive advertising in leading United States newspapers and magazines as well as wide distribution of expensive folders and other publicity material. In view of these activities, there does not seem to be any need to spend additional public funds for this purpose, particularly since a number of large companies are more familiar with the needs and interests of North American travelers and with the advertising techniques which appeal most to them. 4. LABOR POLICIES Recommendation No. 66: Emphasize the common interests in high produc- tivity of workers and employers alike, as a means of improving labor efficiency, on the one hand, and management policies, on the other. While the demands for greater social justice through a cer- tain measure of redistribution of income are quite justified, it cannot be overlooked that relatively little advancement in the living standards of the people can be attained simply by trying to change the existing distribution of income. Any substantial improvement can be derived in the long run only from a PUBLIC POLICIES AFFECTING DEVELOPMENT 255 significant increase in productivity-that is, in the amount of goods produced within the country in relation to the number of workers. Demands for higher wages and greater social benefits may be met, as they have been in the past several years in Guatemala. Unless such claims are, however, also accompanied by an increase in the productivity of labor ( output per man~hour), they will only cause higher production costs. This, unless profits margins can be reduced, results finally in higher prices and higher costs of living, without any long range improvement in the purchasing power and living standards of the workers or their dependents. There are indications that, since 1944, real wages-aside from social benefits-have in some cases not increased substantially. Money wages have barely kept pace with the rise bf the general price level. The Mission feels that it is highly desirable to create a feeling of partnership in a common enterprise on the part of both employers and employees, by convincing both parties that they can gain more by recognizing their basic unity of interests rather than by consistently antagonistic attitudes. Labor should recognize that higher productivity cannot be attained without workers doing their part in establishing high standards of regularity, dependability and alertness. The Mis- sion cannot entirely ignore frequent statements to the effect that such working standards have declined over the past sev- eral years and that higher wages, even though often they have been largely nominal, have given rise to more frequent irregu- larity in working habits. Equally serious responsibilities rest upon management, who should furnish to the worker the machinery and other modern devices which will allow him to be more productive and thus reduce production costs and prices. It may be that some employers, both in manufacturing and in agriculture, have hesitated to proceed along these lines. Employers should be prepared to deal with their workers as partners rather than as subjects. They should be willing to give adequate ret11uneration for increased efforts, so that the workers will know that such efforts will benefit him as well as the enterprise. Employers should help workers to learn 256 THE ECONOMIC DEVELOPMENT OF GUATEMALA modern methods and to create for themselves healthier and more satisfying living conditions. Management should explain to labor the need for changes and, whenever possible, discuss them with workers or their union representatives before any drastic changes are made, especially with regard to mechani- zation. Introduction of the piece wage, after proper preparation and with safeguards against exploitation, may have a healthy effect on labor productivity. On the fincas, particularly, too many survivals of feudalism still flourish. There has been little willingness to recognize that Guatemala has now entered a period of inevitable change, in which both employers and employees must develop new attitudes to meet the require- ments of the new age. In general it can be said that a progressive attitude of management toward new and more efficient methods of pro- duction usually goes along with an understanding of the need for harmonious labor relations. Such management knows that healthy, educated and contented workers are essential for the success of a modern enterprise . . Recommendation No. 67: Insure impartial enforcement of the Labor Code. It is evident that the Labor Code of 1947 represents a very important and necessary step toward defining the relationships between employers and employees. On the other hand, if it is to be a useful instrument in regulating and establishing satis- factory labor relations, it should be handled in a manner acceptable to both parties. It should be clearly recognized that the Labor Code established duties as well as rights for both employers and employees. If it were consistently used against the legitimate interests of employers, it would discourage enterprise of all kinds, prevent investment of capital and tend to bring about a decline, rather than an increase, in production and living standards. Employers in Guatemela complain not so much of the Code itself, as of the manner in which it has been interpreted and implemented by the Labor Courts and Labor Inspectors. This PUBLIC POLICIES AFFECTING DEVELOPMENT 257 is frequently described as having been so partial as to impose unjustified, and at times almost ruinous, requirements upon the employer. While the Mission is not in a position to judge the truth of such charges, it may be helpful to indicate two aspects which seem to be singled out for particularly frequent criticism. It is alleged that regulations governing dismissal have been interpreted in the past by the courts in such a way as to make dismissal of an employee without severance pay almost im- possible, even in cases of neglect of duty. In addition, the sever- ance pay seems to be decidedly onerous in cases in which it is made retroactive without any limitation as to the number of years of service on which severance pay ( one month's pay for every year of employment) is based. The Mission gained the impression that these two practices may have constituted an effective hardship upon business. The Mission suggests that the Ministry of Economy and Labor, or the Coordinating Magistrate of the Labor Courts, prepare simple educational material (leaflets, pamphlets, man- uals and material suitable for radio programs and meetings) explaining the essentials of the existing labor and social security legislation; this should be disseminated as widely as possible among both employers and employees. In addition, Labor Inspectors and representatives of the Administrative Office of Labor should speak to meetings of workers in order to explain the underlying principles and specific stipulations of the labor legislation, m easily understandable terms, and to answer questions. 5. HEALTH Health and sanitation, in any country, are matters funda- mental to economic development. The Mission therefore found it necessary to examine, at least superficially, some of their more important aspects in Guatemala and to formulate some concrete recommendations. Recommendation No. 68: Intensify the fight against contagious diseases, malaria, intestinal parasites and unsanitary condi- tions in general, especially in the tropical lowlands. 258 THE ECONOMIC DEVELOPMENT OF GUATEMALA Budgets . Expenditures for the entire field of public health (preven- tive medicine) in the fiscal year 1950-51 amounted to ~973,000; this was 21.7 percent of the budget of the Ministry of Public Health and Social . Welfare, and 2.1 per"cent of the general Government budget. A number of Latin American countries are spending sub- stantially larger percentages of their government budgets on public health and social welfare. Examples are: Panama, 12.4 percent (1949); Cuba, 8.3 (1949/50); Chile, 7.0 (1949); Mexico (federal government only), 4.7 (1950); Colombia, 4.0 (1950); and Costa Rica, 3.5 percent (1949). The appropriation for the entire Guatemalan public health effort is 35 cents per capita. This appears grossly inadequate in view of the very great responsibilities assigned to the Direcci6n General de Salud Publica. Malaria, intestinal parasites, tuberculosis, filariasis, malnutrition and unsanitary dwellings are ~till sapping the energy of vast numbers of Guatemalans and reducing their productive capacity. Approximately one million people, or more than one third of the total population, live in the endemic malaria zone. Of these, 720,000 comprise the population of the Pacific coastal region which offers particularly good prospects for economic development, provided it can be made reasonably healthy. According to a preliminary estimate submitted to the Mission by competent specialists of the Pan American Sanitary Bureau, the expenditures necessary for the sanitation of this region would be as follows: Safe water supply and sewerage ...................... .. 027,000,000 Outhouses for the rural population .. .............. .. 1,350,000 Refuse disposal (incinerators) ........................... . 227,000 Permanent measures for malaria control ( drainage and refilling) ...... .. ....... ................. .. 1,000,000 Total expenditures for permanent sanitation ( exclusive of housing) ...................... .............. .. 29,577,000 Spreading of DDT for temporary malaria control, per year .... .. .. ....................................... .. . 400,000 It must be emphasized that these figures refer to the pre- ventive health needs ( exclusive of housing) of less than one PUBLIC POLICIES AFFECTING DEVELOPMENT 259 third of the country's population. Yet in the current annual government budget, the total appropriation for sanitation and the fight against malaria and typhus throughout the entire country amounts to only ~233,000, or slightly more than half the estimated annual needs for temporary malaria control by DDT for the Pacific coastal region alone. Furthermore, while the Inter-American Cooperative Health Service has, for the past several years, carried out important projects in permanent malaria control, water supplies, sewerage, etc., these contri- butions are not being continued because the Government has not renewed its agreement with the United States Government providing for these services. Medical Personnel One of the most serious problems is the shortage of physi- cians, dentists and nurses outside of the capital city. In 1949, of a total of 390 practicing physicians in the entire country, 285 ( or 73 percent) work in the capital. While there is one physician for every 695 persons "in Guatemala City, there is only one for 32,437 persons in the rest of the country. Of the 115 dentists, 91 ( or 79 percent) practice in the city. Of the 191 graduate pharmacists, 134 (or 70 percent) are established in the capital. There are only 150 graduate nurses, very few of whom are available in the departments. In 1946, only 5,764 of the total of 62,115 deaths had received medical attention. Of the 120,535 births, only 7,(Y)Q had received any medical attention, and 82 percent of these took place in the municipality of Guatemala. The situation is particularly serious. in view of the equally pronounced shortage of trained midwives, which accounts for the high proportion of prenatal complica- tions and high infant mortality. These simple figures point to one reason for the very high mortality rate and the correspondingly short life expectancy. Quite aside from all ethical considerations, this situation en- tails a tremendous waste of human energies. The problem seems to be not so much an absolute shortage of physicians (although the supply is by no means adequate), but rather the unwillingness of available physicians to serve in rural 260 THE ECONOMIC DEVELOPMENT OF GUATEMALA commumties where life is unattractive and remuneration is extremely inadequate. To remedy this situation, three mea- sures would appear to be indicated: (1) A larger number of trained medical personnel and mid- wives with a lively sense of social responsibility should be employed by the Government with adequate pay, so as to make them independent of private fees. They should be placed in charge of local health centers to be established in as many rural centers as possible. If the Social Security Institute is enabled to develop its program vigorously throughout the country, this plan could well be combined with the program of the Institute. (2) The facilities for training physicians in the Medical School of the University of San Carlos should be im- proved and teaching methods should be modernized. (Facilities of the new Roosevelt Hospital should be available to the Medical School in the near future.) Also, a larger number of students sh,ould be awarded scholarships if they cannot otherwise afford to devote their entire time to study. Such subsidies might carry with them an obligation of the student to devote a minimum of years after graduation to practice in a rural area. (3) In view of the absence of medical assistance in many parts of the country, there would be ample justification for liberalization of the existing regulations which vir- tually exclude all foreign physicians and dentists. Many lives could be saved by permitting qualified foreign professionals to practice in rural regions where no national physicians or dentists are available. Private and Community Efforts It should be recognized that the Government cannot do the entire job of improving sanitation and fighting endemic dis- eases. An important share must be assumed by employers and by local community endeavor. Too little has been done along these lines. PUBLIC POLICIES AFFECTING DEVELOPMENT 261 Some large employers (primarily the United Fruit Com- pany) have demonstrated that tropical diseases can be reduced to a minimum with proper care. A strong effort should be made, not only by government authorities but also by groups of publicly spirited citizens, to impress other agricultural employers and leaders of rural communities with the need for spreading DDT, draining stagnant water, helping families in the building of outhouses, spreading the knowledge of simple practices of hygiene, and providing drainage and safe drink- ing-water. Existing laws, as well as the Constitution (Art. 58, 16), hold rural employers responsible for providing some of these services. Such laws should be strictly enforced. It will be found that relatively little cash outlay is necessary if a sense of responsibility and initative can be mobilized among employ- ers and employees of fincas and residents of small towns. The Government should stand ready to provide the necessary technical assistance through public health inspectors and sanitary engineers. A voluntary National Committee on Public Health might be formed, to include physicians, representatives of agricul- tural and industrial employers and labor organizations, teach- ers, newspaper editors, managers of radio stations and other representative elements. Similar local committees could be created in the various Departments and towns. These commit- tees should work in close contact with the government agen- cies in this field, including especially the Guatemalan Institute of Social Security. They should depend as little as possible on government funds but should attempt instead to get voluntary contributions, in time and money, from as large a sector as possible in their respective communities. Recommendation No. 69: Proceed toward completion of the Franklin D. Roosevelt Hospital in Guatemala City. Completion of the Roosevelt Hospital, which was under- taken with initial assistance from the Inter-American Coopera- 262 THE ECONOMIC DEVELOPMENT OF GUATEMALA tive Service for Public Health, has suffered very considerable delays. The necessary funds have been forthcoming only slowly. In the meantime the efforts of specialists and funds which have already been invested in this project, are not being put to any practical use. A group of Guatemalans who were trained by the Cooperative Service several years ago for specialized positions in the hospital, are not being used in these positions because the hospital is not operating. At the same time, the Social Security Institute has proceeded with the establishment of a hospital of its own in Guatemala City-an undertaking which would seem to be unnecessary if and when the 1,000-bed Roosevelt Hospital is put into service. In view of this situation, it is recommended that all neces- sary steps be taken t~ assure that the Roosevelt Hospital be completed as soon as financially possible. The Mission under- stands that an additional amount in the neighborhood of ~2,500,000 will be required to do this, and in Chapter X of this report the optimum investment budget provides for expen- diture of this sum over a five-year period. Under less favorable conditions, of course, completion will take longer; but in any event it should be possible to open sections of the hospital in advance. 6. PUBLIC ADMINISTRATION Recommendation No. 70: Create a professional civil service system. ·while, realistically, it is recognized that no complete sepa- ration of the civil service from politics can be expected in the near future, all possible measures should be taken to attract competent persons to the public service, to prevent the appointment of unsuitable persons, and to protect efficient public servants from arbitrary dismissal for political or per- sonal reasons. To this end, the Mission strongly recommends the gradual introduction of an effective civil service system on the basis of merit, with adequate job security and a salary scale designed to compete with comparative positions in private employment. PUBLIC POLICIES AFFECTING DEVELOPMENT 263 A Civil Service Statute should determine policies regarding hiring, promotions, guarantees of permanence, removal from office, suspension or transfer, the duties of public officials, and recourse against decisions that may affect them. This is already provided for in the constitution of the Republic (Art. 70); in 1949, ~oreover, a tentative project for an "Estatuto del Empleado Publico" was prepared for the Minister of Economy and Labor, but apparently no action was taken on it at the time. It is further recommended that the Government secure the services of one or more experts in public administration to aid in establishing the civil service system and in drawing up related plans for making public administration more efficient. Recommendation No. 71: Encourage moderate decentralization of public administration. Guatemala shares in the Spanish tradition-continued and perhaps aggravated by the di<:tatorships of the Republican era-of highly centralized public administration and almost negligible local self-government. This situation is a result not only of historical factors but also of the fact that most regions and local communities outside of the capital city are economically too little developed t9 maintain an expensive system of provincial or local government. Many smaller com- munities lack enough educated and experienced residents to staff local administrative bodies with autonomous responsi- bilities. This weakness of town and village life has led to increasing dependence upon the central government for the satisfaction of even purely local needs, instead of reliance on local initiative and cooperation among neighbors. Thus, the door has been opened to undesirable political influence and an inertia which expects all progress to be bestowed from above. Furthermore, the existing system of highly centralized public administration has resulted in focusing disproportionate attention on the capital city to the comparative neglect of the needs of the rural departments. This completes a vicious 264 THE ECONOMIC DEVELOPMENT OF GUATEMALA circle, which ought to be broken if there is to be a more equit- able and balanced development of the various regions of the country. Finally, at the moment altogether too many functions are reserved for the heads of ministries, executive departments and other governmental and autonomous a~encies. These few individuals often find it physically impossible to attend to everything expeditiously. Administrative decentralization within each of the agencies is clearly indicated in the interest of greater accomplishment. Moreover, additional local func- tions should be delegated to the departmental governments, which in effect are now merely the agents of the central government and the intermediaries between the national and municipal governments. To encourage the development of local talents and respon- sibilities, wherever possible governors and other departmental officials should preferably be chosen from among people of the region where they are to serve, and should be permitted to remain long enough in the department to become intimately acquainted with its needs and possibilities. Law No. 227, Art. 6, limiting the service of a governor to three years in any one department, while based on justifiable reasons, may tend to defeat this objective. It would be highly desirable to stimulate greater voluntary efforts by the citizens of communities. Local needs in public health, sanitation, water supply, irrigation, drainage, roads, etc., could be met, at least in some measure, without waiting for the central government to provide funds and personnel. Time and money could be saved, because neighbors can do many things with their own hands for which the Government would have to pay cash; but even more important, a healthy spirit of collective self-reliance could be created. The Indian municipalities have a valuable tradition of local cooperation, which should be carefully preserved and studied in its appli- cation to modeI,"n needs.  CHAPTER IX Financial Resources A vaila:ble for Investment I. General Outlook Broad investment programs for development, such as are proposed in the final section of this report (Chapter X), can- not be formulated realistically without a prior analysis of available financial resources. Accordingly, while no attempt has been made to present a detailed analysis of the financial resources of Guatemala, the Mission has found it desirable to examine briefly the principal sources from which development funds may come and to recommend suitable action in certain cases to make these funds available. A distinction is made between Central Bank borrowing, internal sources offering immediate promise, other internal sources requiring a longer time to develop, and external sources of financing. These are discussed individually in the following pages. II. Central Bank Borrowing Recommendation No. 72: Avoid further large-scale Central Bank loans for financing state expenditures in the near future. Central Bank borrowing has been the main-if not in fact the only-nonbudgetary source of funds to which Guate- mala has resorted recently for large-scale public and semi- public investment. Between 1948 and 1949, in the portfolio of the Banco de Guatemala, government paper having · monetary effects in- creased from @3.7 million to @10.8 million, or nearly trebled. 1 These resources were used mainly to supply the capital of INFOP, to finance the Stadium and Olympic Games, and to build low-cost housing. On May 31, 1950, the investment port- folio of the Banco de Guatemala stood as shown in Table XXXII. 1 SOURCE: A1nual Report of the Ba11co de Guatemala for 1949. Purely bookkeeping transactions witliout monttary effects have been excluded. 265 266 THE ECONOMIC DEVELOPMENT OF GUATEMALA TABLE XXXII INVESTMENTS OF BAN CO DE GUATEMALA, AS OF MAY 31, }950 Item Amount A AUTHORIZED A N D REALIZED: Medium-and long-term bonds of National Mortgage Bank (mostly for low-cost housing) ............. .............................. . 01,429,700 Treasury ·bills and notes for building of Stadium .. ...... ....... . 2,750,000 Treasury bills and notes for Olympic Games .... .. ... ........... .. .. 900,000 Treasury bills and notes for capital of INFOP ....... .. .. ........ . 2,500,200 Treasury bills and notes for emergency expenditure (floods) ...... .. ........... .. .. ....................................... ........ ...... ......... . 1,300,000 Loan to City of Guatemala ................................................ ........ 294,800 Hospital plan of Social Security Institute ........ ... ............. ... . 15.000 Total ................... ................... .. ............................. . 9,189,700 B AUTHORIZED ONLY: Mortgage bonds (for popular housing) ............................... . 1,400,000 Treasury bonds (capital INFOP) .......... ............... ................ . 2,000,000 Treasury bills (hospital plan of Social Security Institute) 35,000 Treasury bills (government loan to City of Guatemala) 500,000 Total ................................................................ 3,935,000 Grand Total .... ..... ... .. ... ........ ... .... ............. .... .. .. .. . 13,124,700 Sou11cE : Banco de Guatemala. It is to be noted that amortization is taking place regularly on these investments, thus operating to reduce their absolute amounts. But under Guatemalan law, public and semipublic securities cannot be purchased by the Banco de Guatemala in excess of the margin between international reserves and the amount represented by 25 percent of the average sales of for- eign exchange in the preceding three years. This disposition allows only a small margin for public borrowing from the Central Bank over and above what has already been borrowed. More important than legal rules is the inflationary threat inherent in Central Bank borrowing and the fact that, during 1948, 1949 and 1950, international reserves fell from 49 million to 37 million quetzales. Regardless of reasons for this loss in reserves, it unquestionably warrants a cautious and firm monetary policy, incompatible with further large-scale re- course to the issuing institution. In this connection it is worth noting that the organic law of the Banco de Guatemala was amended in 1948 tt> oblige the FINANCIAL RESOURCES AVAILABLE FOR INVESTMENT 267 Bank to subscribe to the issuance of mortgage bonds for popular housing and also to allow rediscounts up to three years instead of one year. These amendments indicate a dangerous tendency to break down the safeguards provided in the original law and a tendency, at least in some public circles to ignore the monetary policy set forth by the "Junta M onetaria": The danger would be aggravated by similar financ- ing of proposed new state development institutions such as the Industrial Bank, the Labor Bank and the National Tourist Corporation. It is apparent that further use of Central Bank funds in this way connot be resorted to now without danger to the currency. To justify such a course would require a project of exceptional merit indeed. III. Internal Sources of Early Promise 1. TAXATION Recommendation No. 73: Reorganize the tax system to increase revenues. Competent observers agree that the Guatemalan tax sys- tem offers substantial opportunities for increases in yields. Specific points in this connection are that: (1) present tax administration could be improved, in some cases greatly; (2) some tax rates are unnecessarily low; and (3) there are several untapped fields of taxation available. Tax Administration Fiscal administration appears to be in need of certain reforms. High collection costs, slow and inefficient processing, inadequate assessments and various forms of evasion are depriving the treasury of large sums which should be avail- able for public use. Administration of the business profits tax could be im- proved. Auditing of declarations is one or two years behind and the number of accountants is not sufficient to handle the accumulation. Moreover, the auditing consists merely in checking the declaration against the figures in the taxpayer's 268 THE ECONOMIC DEVELOPMENT OF GUATEMALA books. No attempt is made to verify the figures by approx- imate checks on volume of business, inventories, mark-ups and similar information. There is apparently a good deal of tax evasion in the valuation of profits on retail sales. This is made easier by poor accounting methods. While little can be done in the short run to improve bookkeeping practices, a more aggressive auditing of tax returns would result in an immediate gain in revenue. The business profits tax was estimated at over five million quetzales in the 1950-51 budget. It does not appear unreasonable to assume that a 10 percent increase in receipts could be accomplished without difficulty, giving addi- tional revenue of ~500,000. Real property taxation is based on an assessment of real estate values made in 1921 and revised upward in 1931. An- other revision was begun in 1945, but by 1949 only 25,000 properties were reassessed out of a total of 125,000. The assessed value of most properties is far below market value, representing no more than 20 percent of the latter for urban property and SO percent for rural holdings. 2 Underassessment is also reflected in losses to the State through lowered taxes on property transfers, such as sales, gifts and inheritance of real estate. Delinquencies on property tax are known to be high. Tax collectors in the departments are often paid under commer~ial contracts, receiving 20 percent of the collections, with a maxi- mum of ~100 per month; this results in a slackening of collections as soon as 0100 have been earned. Delinquencies are also common in property transfer taxes. These showed as estimated total yield of almost ~700,000 in the budget for 1950-51. Upward revision of valuations, to- gether with stricter action against delinquency, could double these proceeds without altering the rates. To pursue this one step further, studies 3 show that the costs of collection of some taxes, including the above-men- • This higher rate on rural property is a result of their frequent need for mortgage borrowing. Under the banking law, such loans cannot exceed 50 percent of the assessed value of the property. 1 Adler, Schlesinger and Ol sen, op. cit. ' FINANCIAL RESOURCES AVAILABLE FOR INVESTMENT 269 tioned ones, ran as high as 47 percent of the yield in 1947-48. It would be advisable to determine how these costs could be lowered, or whether some of them are worth so much effort if they leave so little for the treasury. Another, and perhaps the most important, source of revenue loss is in the field of liquor taxation. It has been estimated that, out of a total of 12 million liters of alcoholic beverages produced yearly in Guatemala, only eight million pay the excise tax. Other sources indicate that, in the departments of the Occidente region, contraband liquor represents about 40 percent of consumption. It is generally believed that loss in reve11ue to the State from evasion of this tax alone amounts to three or four million quetzales. Granting that it would be too optimistic to expect that contraband could be completely eliminated, at least one million more quetzales could be obtained if enforcement were strengthened and penalties increased. Coffee Export Tax Before the recently adopted law creating an additional tax on coffee exports, the rate was 1.65 cents per pound. '.This tax has now been raised to a total of 6.00 cents per pound, or approximately 12 percent ad valorem at present prices. While this effort is slightly less than what has been realized in other countries (such as El Salvador) an important gap in Guatemala's system of taxation has thus been filled. Un- fortunately, however, only a small portion of the proceeds of this tax can be expected to be made available for economic development. The estimated additional ~4,350,000 that this tax will yield have been allocated as follows: To meet unspecified needs of the budget... ......... 02,700,000 For highway improvement..... .. .. .. .. .......... .. .. ...... .. ..... 1,000,000 Contribution to the capital of a new National Coffee Institute (in charge of improving coffee production and marketing) .. .. .. .. .. .. .. .. .... .. .. .. .... .. .. 250,000 To increase the "Fondo de Regulacion de Val ores" of the Banco de G1,atemala.... ........ .. .. 200,000 To be used for extraordinary amortization of treasury letters and treasury bonds.. .. ...... .. ...... .. 200,000 270 THE ECONOMIC DEVELOPMENT OF GUATEMALA It is disappointing to note the small share of these new resources that is earmarked specifically for economic and finan- cial improvement and the large amount to be used for current administrative expenditure. As for the National Coffee Insti- tute, its value has been questioned in Chapter II. For many years the current expenditure of the State has been met without recourse to any high coffee export tax. In the present circumstances, with coffee prices at an all-time peak, the Mission feels strongly that the State's share in coffee profits should be used almost exclusively for development purposes. It would be better to employ these funds in measures which can later help to cushion the consequences of a possible fall in coffee prices, rather than for largely unproductive state expenditure. The present distribution of these resources (62 percent (or general budget purposes and 38 percent for amortization or development) should at least be reversed. At the same time, the Mission suggests that taxation of coffee should be on a progressive ad valorem basis. Since shipments commonly include grades of different prices, admin- istration of a purely ad valorem tax presents difficulties. How- ever, there are ways in which it could be determined by· an average weekly or monthly New York price for all grades, or by some similar periodic adjustment. Furthermore, the Mission believes that the effective tax rate at present coffee prices should be at least equal to that in force in El Salvador, or 15 percent. In this way additional resources from the coffee tax could be put at four million quetzales, assuming no increase in the present coffee exports. If recommendations in Chapter II are carried out successfully, these resources would be further increased within the next six years by an estimated maximum of two million quetzales. Revenue from coffee must play an important role in the national development. In estimating resources available for its proposed program, the Mission has assumed that the effec- tive tax rate will be raised to 15 percent by the end of the fiscal year 1951-52. FINANCIAL RESOURCES AVAILABLE FOR INVESTMENT 271 With these reservations as to the current rate and disposi- tion, the Mission can give wholehearted approval 'to the long overdue rise in the coffee export tax. It is hoped the temporary legislation under which this was done will soon be made permanent, but with amendments providing for more produc- tive use of most of the funds raised. Property Tax Independently of the reassessment of real estate values on which the property tax is based, it appears that the present very low rate of that tax (three quetzales per thousand) could be increased. This would be facilitated if the exemption of small properties-at present those valued at less than {?2100- were raised to {?2300. A rate of four or five quetzales per thousand would be possible, and would result in further in- creases in revenue. The present low rates for inheritance and gift taxes could also be raised with advantage. Luxury Import Tax Duties could very well be raised on certain luxury goods, whose importation is by no means essential to national welfare or development. Increases could apply, for instance, to such articles as gold and silver jewelry, watches, silks, perfumes, fine china, etc., which are purchased only by comparatively wealthy people. Additional ad valorem duties could also be imposed on heavy, luxury-type passenger cars; the equivalent amount of foreign exchange spent for lower-priced cars would buy the nation more transportation capacity. Personal Income Tax The establishment of a personal income tax, as now pro- posed, would be an important modification of the existing tax system. By applying to all incomes at progressive rates (in- cluding agricultural, professional and salary incomes, which at present are tax free) it would be a step towards higher standards of fiscal productivity and justice. From a purely budgetary point of view, however, it is not certain that the · introduction of the personal income tax would result in greatly increased revenues. Important classes of income, such as 272 THE ECONOMIC DEVELOPMENT OF GUATEMALA coffee, export receipts and business profits are now subject to taxation. Collection of the coffee export tax and business profits tax will necessarily have to be credited against the new income tax, thus reducing the net increase in receipts to be expected. Efficient administration of the income tax will be slow to develop. The experience of many countries has shown that the administration of a personal income tax, particularly of professional groups and farmers, is far more complex than administration of a business or corporate income tax. For this reason, it is difficult to estimate the additional funds which might be derived. It seems possible, however, that even after deduction of income already taxed under business profits or coffee export taxes, additional revenues of almost one million quetzales could be obtained during the early years of appli- cation of the new income tax. This yield should increase as the administration of the tax improves. Taxation of Foreign Enterprises Related to the question of the new income tax is the problem of taxation of foreign enterprises, such as Empresa Electrica de Guatemala, United Fruit Company and the Inter- national Railways of Central America, which are now largely exempt. Substantial possibilities appear to exist here. At present the only taxes paid by foreign companies are small export taxes on bananas and other taxable agricultural products, property taxes, and import duties on items other than capital equipment. The railroad equipment and electrical installations of IRCA are exempt from the property tax. Taxation of income earned locally by such companies will not necessarily increase total international tax liabilities of the enterprises. A provision of the United States law allows these corporations to be credited, for income tax purposes, with the amount of taxes on their net income paid to other countries. Thus, additional revenues in the magnitude of at least one million quetzales might readily be obtained without adding to the international tax burden of foreign investors. This question cannot be solved, however, until the more gen- FINANCIAL RESOURCES AVAILABLE FOR INVEST M ENT 273 eral one of readjustment of existing contracts is successfully settled. Summary of Tax Possibilities A recapitulation, intended only to present a rough order of magnitude, shows the following increased gross annual revenues which might be expected to become available for development purposes to be expected from tax reforms : Business profits tax .. ..... .. ...................... .... ..... ... ...... . 0 500,000 Liquor tax ... ..... ......... ... ..... ......... ... ..... ... ..... ...... .. ... . 1,000,000 Proceeds of coffee export tax• .... .......... .......... ... 4,000,000 Income tax ( fir st year) .... ... ........................ ...... . 1,000,000 Increase in property tax ... 700,000 Taxation of foreign enterprises ... .... .... .... ...... 1,000,000 Total ...... . .... ........... .................... ...... 08,200,000 • Based upon suggested increase in r ate and redistribution of resultant revenue, with a higher percentage of the total allocated to development. Admittedly, such tax reforms cannot be realized on short notice. To realize a target for improvement of over eight million quetzales in tax receipts will require several years of sustained effort. Nor can any precise assumptions be made as to the rate of progress towards this target. Yet in deter- mining the sums available for investment, it does not seem unreasonable to assume that approximately one fourth of the target, or two million quetzales, can be realized during the first year. This could be obtained from the coffee tax alone. 2. PINCAS NACION ALES By a decree of February 15, 1949, the Pincas Nacionales e Intervenidas have been given a measure of autonomy. This could be the beginning of administrative reform which would give an important role to the Pincas Nacionales in the financing of economic development. After a thorough administrative reform is successfully carried out (see Chapter II), the receipts to come from the Pincas N acionales could unquestionably be increased. Taking into account coffee only-the simplest product to forecast- we may assume the average cost of production at the finca, 274 THE ECONOMIC DEVELOPMENT OF GUATEMALA exclusive of export tax, to be @18 per quintal oro. 5 At a con- servative sales price at the beneficio of @40 per quintal (as against @52 in August 1950), the net profit per quintal before tax would be @22. With an average crop of perhaps 230,000 quintales, the net profit would be about five million quetzales or two million more than the most optimistic estimate of present profits. This does not take into account the receipts to come from some 150,000 quintales of sugar, 100,000 stems of bananas, and quantities of honey, cacao, citronella, live- stock and other products which, in our opinion, should cover the cost of an accelerated modernization and equipment program. 3. GoVERNMENT ECONOMIES Recommendation No. 74: Create a temporary independent committee, report- ing directly to the President of the Republic, to review public expenditures for possible economies. While the Mission had neither the responsibility nor the opportunity to review the whole field of public expenditures, it could not help but notice that substantial economies could be realized in public administration and public works. Past expenditures on a variety of useful but not directly productive undertakings have perhaps been an obstacle to the completion of projects of greater economic value. The Olympic Stadium is a case in point. Possibly, too, some of the funds spent for new school and hospital buildings, as well as for the coloniza- tion of Poptun, might have been put to a more immediately productive use if economic criteria had been applied. Other fields which might be investigated with profit include the procedure for recruitment and dismissal of government employees, the cost of operating and maintaining government vehicles, direct and indirect expenditures on publicity and propaganda of a- ditures occa- ll kinds, and finally, the expen_ sioned by stoppages in public works through a lack of treasury funds. • Washed and depulped coffee. FINANCIAL RESOURCES AVAILABLE FOR INVESTMENT 275 The Mission is of the opinion that an energetic and non- political ad hoc committee, devoted to the task of realizing justified economies, could point to numerous opportunities for saving government funds. It could at least help to check the natural tendency of government expenditures of an unpro- ductive nature to rise, which diverts funds from more useful economic purposes. Such a committee should be temporary and should render its recommendations within the first year of the new administration. Economies of one million quetzales would be a reasonable target. It may be difficult to accomplish such a cut on purely administrative expenditures, owing to the low salaries of civil servants. But it must be remembered that over 50 percent of budgetary expenditures in recent years have been for social, cultural and economic improvements and that within this 50 percent many expenditures can undoubtedly be found that are' not of the first priority. It seems safe to assume that one million quetzales for investment could come from economies of all kinds. IV. Internal Sources of More Distant Promise 1. PRIVATE SAVINGS Recommendation No. 75: Open depositories for private savings in outlying centers of large employment. Private savings are now very small in Guatemala. Total savings deposits amounted to only ~1,500,000 in February 1950,6 although they had almost doubled since the. end of 1947. Such deposits, which averaged about ~80,000 a year between 1939 and 1947, rose sharply during the years 1948 (an increase of ~151,000); 1949 (an increase of ~387,000), and 1950 (an increase of $137,000 between January and April). This indicates encouraging progress, although the total is still not great. 8 Of these "savings" deposits, 70 percent were, in fact, sight deposits.  276 THE ECONOMIC DEVELOPMENT OF GUATEMALA INFOP, through its special department which recently initiated an educational campaign to promote savings, certainly helped to bring about the increases in 1949 and 1950. One private bank also is beginning to promote savings deposits. Payroll savings organizations have been created among em- ployees of business firms and important, long-term, educational effort has been undertaken in the form of savings organizations in schools. -Nevertheless, large resources remain untapped. Some of the largest individual payrolls in the country are found out- side the capital, in such places as Puerto Barrios, Bananera and Tiquisate. Wage and salary payments of the United • Fruit Company and its subsidiaries totalled 09.7 million in 1949. The percentage of such salaries which could be saved is probably small, but such sums could be significant in the aggregate. It is believed in some quarters that the Indians are hoarding large resources. This is open to question until more tangible evidence is available, and even if true it will take patient education to mobilize such savings. Some progress on this as well as mobilization of savings from smaller local payrolls might, however, be made by establishment of a postal savings system using savings stamps. Though no illusions should be entertained as to the total amount of resources that could come from voluntary savings at present (0500,000 a year would be a satisfactory beginning), there is no doubt that action already initiated in that field should be continued and intensified, particularly outside of Guatemala City, with a view not only to immediate but to future benefits. 2. INSTITUTIONAL SAVINGS Recommendation No. 76: Require insurance companies to invest in Guate- malan securities an appreciable part of the pre- miums collected in Guatemala. Outside of institutions regularly receiving savings deposits (mainly the Credito H ipotecario Nacional and the Savings ·sec- FINANCIAL RESOURCES AVAILABLE FOR INVESTMENT 277 tion of INFOP), there are other institutions collecting savings in an economic sense. Some of the most promising sources of investment funds in Guatemala seem to be offered by insur- ance companies. At present, the only legal requirement that insurance companies invest in the country appears to be the Decree of May 17, 1932, providing that life insurance companies main- tain a deposit of not less than @50,000 in the Bank of Guate- mala and pay a tax of three quarters of one percent on the value of premiums collected. No obligation to maintain a guarantee deposit seems to apply to insurance against fire or accidents. . This situation is anomalous. Premiums collected by insur- ance companies during 1949 included @712,478 for fire and accident policies, out of total premiums amounting to @1,656, 736. The value of fire· and accipent insurance policies as of December 31, 1949, totalled @65,186,297, against @18,936,723 in life insurance policies. In the opinion of the Mission, resources from insurance funds are not now utilized to the best interests of the country. Legislative action in this field could provide sizeable resources in a fairly short time. A project recently presented to the National Congress would require investment in Guatemala of the reserves neces- sary to guarantee risks insured by foreign companies operating in the country. The Mission is of the opinion that the project should be amended to provide for a less drastic and more gradual change, to offer more flexibility in the types of invest- ment offered insurance companies, and also to avoid requesting investments in quetzales as a counterpart of dollar risks. Technical assistance on this matter could readily be obtained. One remaining institution collecting savings (in the broad sense) is the lnstituto Guatemalteco de Segiiridad Social. This institution has, however, no reserves, since it operates under the "repartition" or "social budgeting" system, in which re- ceipts in one year are applied to expenditures of the same year. The organization cannot be expected to contribute funds for general investment, therefor, except as. social security funds 278 THE ECONOMIC DEVELOPMENT OF GUATEMALA are employed for a special class of investment in human improvement. 3. DOMESTIC PRIVATE INVESTMEN'l' Private productive capita:! formation is small. It has been accomplished mainly through the initiative of certain enter- prising individuals rather than through the public marketing of securities or the investment of reserves by large companies. The volume of private productive investment ( excluding resi- dential construction) in 1948-49 did not account for more than 20 percent of total capital formation. Up to one half of the other 80 percent resulted from public investment and the remainder from private nonproductive investment such as real estate speculation. Yet financial resources for productive investment are not lacking in Guatemala. Their importance can be seen from the large amounts of funds belonging to Guatemalans but held outside the country. According to the latest statistics of the Federal Reserve System, private holdings of Guatemalan citizens in the United States alone amounted to around ~14 million in 1950. This figure is probably conservative. It is unfortunate that such an important volume of funds, originating in a country that is so much in need of productive capital, should be kept abroad. This, however, is the result of some basic and long-standing economic and social character- istics of Guatemala. Relations between successive govern- ments and certain elements of the business community have been subject to chronic strains, resulting in a general lack of confidence and an unfavorable climate for private investment. In addition, of course, the country lacks some of the basic conditions in the form of social capital necessary for successful large-scale business enterprise, i.e., transport facilities, power, health, education, etc. The correction of these conditions can be achieved only in time. Yet there are a number of practical steps which could be taken immediately to help offset these shortcomings. In recent years the activities of the Government in foster- ing more progressive social and economic conditions have FINANCIAL RESOURCES AVAILABLE FOR INVESTMENT 279 sometimes created an impression that legitimate profit-seeking business enterprise is not looked upon with favor. The impres- sion is very largely psychological. It can be explained by the large and rapid adjustments that have been asked of business since 1944, in an effort to make up some of the time lost to social evolution under the preceding administrations. The change was abrupt and many businessmen and finca owners were unprepared for it. Many positive features of the regime-particularly taxation -actually favor business enterprise. However, the manner in which the labor laws have been interpreted, and especially some decisions of the labor courts, have been less favorable and not always free from demagogy. Investment could be encouraged by positive declaration by the Government, cal- culated by reassure legitimate business enterprise. Words would, of course, have to be accompanied by action. Some revision of the more controversial features of the labor laws, supported by full enforcement and impartial decision of labor conflicts, could certainly do much to improve the incentives for private capital. Other useful action could be taken in the more limited field of taxation. Taxation incentives to productive investment are, it is true, already provided by the Industrial Development Law of 1947, under which tax exemptions can be granted for limited periods of time to new industries significant in the national economy. Exemptions under this law include the waiving of customs duties on capital equipment and raw materials, sus- pension of the property tax, and reduction of the business profits tax. As an incentive to investment and industry this policy appears to have been moderately successful. Yet it appears necessary not only to encourage productive investments, as has been done so far, but also to discourage unproductive ones. The proportion of relatively unproductive capital formation is very high. Probably one of the most useful correctives would be the capital-gains tax to discourage specu- lative, nonproductive investments, particularly in real estate, and inventory purchases. At present, such activities are taxed 280 THE ECONOMIC DEVELOPMENT OF GUATEMALA only at low rates by the real estate transfer tax and the capital stock transfer tax. Creation of a capital-gains tax is a matter which requires serious technical investigation if the tax is to be successfully enforced. The tax should be collected upon transfers of prop- erty and on the basis of valuations made according to objective criteria, such as an index of construction costs, a coefficient multiplying annual incomes, or other devices. Legislative and administrative practices in other countries offer models of systematic procedures and standards of tax appraisal and technical assistance on the subject can be obtained. The capital- gains tax should later be incorporated in the income tax. It is clear that a deliberate government policy encouraging business and the provision of tax incentives are not in them- selves enough to allow reliance on private capital as the main source of economic development. It would be too optimistic to expect private capital to finance more than a small part of the basic improvements required in transportation, communi- cations, power, warehousing, education or health facilities. These, in the initial stages, must be essentially the task of public authorities in order to facilitate economic development. Experience in other countries indicates that progress in private investment generally follows and supplements judicious in- creases in public investment. Other and somewhat artificial incentives to investment, such as the sales of guaranteed, liquid, high-rate and tax- exempt "participation certificates" in a publicly held invest- ment trust fund might be useful at some later date. But their utilization would probably be premature at present, since the newly created financial instruments would compete for avail- able resources with public bonds of similar characteristics. Needs for investment in the public sector are at present large enough to utilize fully the capacity of any securities market that could be created. 4. THE GoVERNMENT BOND MARKET Development of a Guatemalan market for Government securities is handicapped by the same lack of confidence that FINANCIAL RESOURCES AVAILABLE FOR INVESTMENT 281 is the fundamental obstacle to private investment. This has been further aggravated by the treatment received by creditors of the State in the past and by the attractive returns available from investment in mortgages, trade, or speculation. Between 1899 and the Monetary Reform of 1924, the Gov- ernment had recourse to inflation for financing its current requirements and debt obligations. This resulted in a drastic depreciation of the old peso to 1/60 of its original value. Sav- ings in liquid form were almost totally lost. During the fiscal year 1938-39 the Government, utilizing cash balances accumu- lated in previous years as well as a tax anticipation loan of one million quetzales from the Compania Agricola de Guatemala (United Fruit Company), repurchased in full the outstanding internal bonded debt at the drastically reduced rates prevail- ing in the market. This experience still lingers in the memory of Guatemalan investors. On the technical side, much has been done to try to develop the government securities market. Prices of these securities have been supported in the open market and their effective rate of return has been increased by favorable tax treatment. The law creating the Ba.nco de Guatemala also estaglished a fund for the regulation of the bond market (Fondo de Regula- cion de Valores) which supports most official or semiofficial obligations. The Banco de Guatemala is the fiscal agent of the Government and has scrupulously met its interest and amorti- zation obligations. Ownership, transfer, and income of all government and semigovernment securities are exempt from all existing taxes and from all taxes that may be levied in the future. All this, however, has not been enough to overcome the basic reluctance of investors. As tax administration is · im- proved and if and when the proposed income tax law is passed, tax exemption for public securities should prove a more effect- ive incentive than it has been up to the present. Existing measures seem entirely appropriate and on the purely technical side there is probably little to add to them. It is possible, however, that the creation of government securi- ties in dollar currency might help the repatriation of some 282 THE ECONOMIC DEVELOPMENT OF GUATEMALA funds held abroad and also provide an opportunity for foreign institutions operating in the , country to invest their funds domestically. This question deserves more detailed study. It is also possible, in the case of a specific project for eco- nomic development, that the Government could market securi- ties of the particular government agency charged with execu- tion of the project, provided that the agency is established on a non-political basis and has a management of recognized competence. Current experience in El Salvador seems to encourage the belief that assistance to Guatemala by a competent marketing expert would be very helpful in the development of the govern- ment bond market. The Mission feels, however, that such assistance would be fruitless without either a notable improve- ment in the psychological atmosphere or well-designed and independently managed development projects. V. External Sources I. FOREIGN DIBECT INvEsTMENT F~reign private capital has played an extremely important role in the development of Guatemala. There is no reason why it should not continue to do so. There are still many important fields where the combination of Guatemalan natural and human resources with foreign capital can serve the best interests of both parties. Direct foreign investment can con- tribute to higher living standards for Guatemalans through greater production, technological progress, profitable employ- ment and increased exchange earnings. It must be recognized that foreign investments in Guate- mala have also had some less favorable effects which have not entirely disappeared. This, however, should not obscure the very real and positive advantages that such outside private endeavor offers. The Need for Reasonable Compromise Large obstacles to foreign investment in Guatemala appear to be mostly of a psychological nature. A typical instance is FINANCIAL RESOURCES AVAILABLE FOR INVESTMENT 283 . found in the relations of Guatemala with important foreign companies that have been established in the country for many years. While the foreign companies, in the eyes of the Guate- malans, may have resisted changes in their former position of economic privilege and political influence, it is alleged in turn by the foreign companies that the Government has indulged in unfair practices, particularly in its labor laws and their enforcement. Concrete examples are not lacking on either side in support of the opinion that a fair settlement has been, up to the present, made impossible by the intransigent attitude of the other party. The Mission is not in a position to pass judgment on the merits of each case, but it is strongly of the opinion tliat the psychological atmosphere could be cleared without any really fundamental sacrifices by either side. The Government, without abandoning any of the essential principles of the 1944 revolution now firmly established, should recognize the fact that activities of foreign companies have been instrumental in the development of Guatemala and still contribute greatly to it. The foreign companies should refrain from any direct or indirect political activity against the Government; and they should accept, perhaps less reservedly than they have thus far done, the need to adapt their legal status and their operations to changed conditions. Such a change in attitude would appear to be a prerequisite to more positive measures towards con- structive cooperation. The Mission is aware of the official policy of the Govern- ment regarding foreign investment. This policy, as expressed at the Conference of American States at Bogota in 1948, legiti- mately seeks to protect the permanent interests of the country against wasteful or excessive exploitation of natural resources and to preserve the sovereignty and political independence of the country. No changes .are suggested in this policy. But it is possible that in specific features of the laws, or in certain practices followed in the enforcement of the law, the Government may 284 THE ECONOMIC DEVELOPMENT OF GUATEMALA • have lent color to the accusation of having discriminated against foreign capital, with harmful effects upon the inflow of new private capital into the country. Even the appearance of discrimination should be carefully avoided, because the creation of an atmosphere of confidence is of paramount importance. A specific point to be mentioned might be the provision in the Labor Code for special benefits to workers in agricultural enterprises employing more than 500 workers. It is realized that this provision is not expressly limited to foreign enterprises. Nevertheless, it would be diffi- cult to deny that the number of enterprises falling within the provision is obviously restricted and that the special treat- ment (which, in fact, creates two unequal classes among workers) has been a source of friction with the foreign com- panies. Revision of Legal Status It is the view of the Mission that if a few obvious adjust- ments can be made, both in the general attitude toward foreign investment and in some of the positive aspects governing it, the way might be paved for a successful revision of the legal status governing activities of the United Fruit Company and the International Railways of Central America in Guatemala. The basic philosophy of the present contract with the International Railways of Central America, concluded in 1923 and running until the year 2009, does not appear fundamentally different from that of the first concession granted by the administration of General Barrios as early as 1877. The original contract with the United Fruit Company was con- cluded in 1901. These dates by themselves illustrate the out- moded character of these agreements. There is need to approach their revision in a fair and open-minded manner, rather than in a legalistic way, since no solution can be found if each party stands firmly on what it considers to be its own rights. It is apparent that, even at present, both t.he foreign com- panies and the Government find it in their own interest to maintain working economic relations. Once these relations are FINANCIAL RESOURCES AVAILABLE FOR INVESTMENT 285 put on a firm and mutually satisfactory basis by the revision of. the contracts, an extremely important cause of friction between Guatemala, private foreign investors, and perhaps even some sectors of public opinion in other countries may well have been eliminated. Publicizing Guatemala's Advantages Corrective measures outlined above, aimed at the elimina- tion of existing obstacles to the flow of private capital into the country, should be supplemented by positive action by the Government to preserve and develop the many real attractions Guatemala can offer to foreign capital. One of these advantages is the I-ow level of taxation. New enterprises qualifying under the Industrial Development Law can get special benefits; but even after the initial period of exemption has expired, the normal taxation of foreign enter- prises is moderate. Other features include a variety of climates, rich soils, adequate power potential; forest resources and an adaptable labor force. In the field of minerals and other raw materials of strategic importance, such as abaca, the favorable location of the country near to markets in the Western Hemisphere is a further inducement to foreign capital seeking investment. It is the opinion of the Mission that such attractive char- acteristics of Guatemala are not well enough known abroad. Without suggesting that Guatemala should undertake a costly publicity campaign, it would be useful to counteract in every possible way the unfavorable and largely unjustified impres- sion that has recently been created abroad. This could be done in some measure by emphasizing the positive factors that are favorable to private foreign enterprise and the full co- operation which the Government is ready to extend. Such publicity could be particularly successful at the present time, when capital is seeking refuge from war risks and high taxation in Europe and North America. Potential Foreign Direct Investment It is difficult to evaluate closely what could be accomplished by foreign private investment in the various fields of economic 286 THE ECONOMIC DEVELOPMENT OF GUATEMALA activity. If commercially attractive oil deposits were proven, this would be the largest single field. The capital involved for full-fledged exploitation would certainly run into tens of millions of dollars. A substantial portion of this investment would have to be spent on roads and other permanent im- provements, in the Peten or wherever drillings were carried out. Another important potential development is the recently postponed program of the United Fruit Company for rehibili- tating diseased banana land, requiring an investment of up to eight million quetzales. A large proportion of this sum would be spent locally on payrolls and other services and if revision of the present contract were to be carried out, Guatemala would share in the benefits of the increased activities of the company. Still other opportunities lie in the field of mining, where substantial investments have been made successfully in recent years and where the cooperation of foreign enterprise appears to be quite satisfactory. These experiences can be expected to encourage other foreign investors to develop unexploited resources, particularly after the necessary improvements are made in the transport system. Admittedly, private investment in each of the fields men- tioned could not alone provide the resources that are necessary for the over-all basic social equipment of Guatemala; but it could make a major contribution. 2. INTERNATIONAL CREDIT Recommendation No. 77: Maintain and improve Guatemala's international credit position by efforts to strengthen the balance of payments position and by the adoption of internal financial policies designed to avoid inflation. Balance of Payments Apart from the nonrepatriation of export proceeds, recent deficits in the balance of payments have been primarily caused FINANCIAL RESOURCES AVAILABLE FOR INVESTMENT 287 by increased importation of productive equipment and raw materials. These, of course, reflect a measure of economic development. The deficits have been met out of accumulated reserves. This loss in reserves leaves but little leeway, however, and must be corrected to preserve the stability of the currency. From the point of view of developmert also, an improvement in the balance of payments is essential. Even after the present deficits are corrected, it will be necessary to allow for the direct and indirect effects of additional investment expendi- tures as recommended in this report. According to estimates recently made by experts of the Federal Reserve System, such expenditures may result tem- porarily in additional imports, the value of which could be as high as SO to 60 percent 7 of the total new outlay. On this basis, ~10 million of the additional development expenditures which could be financed from internal sources by noninfla- tionary means would result in the expenditure of some six million dollars of foreign exchange. To the extent that the recent deficits were attributable to accumulated demand for imports, some automatic correction will take place. This recovery is already being aided by the high price of coffee. Yet the foreign exchange needed to meet the requirements of the recommended investment program probably could net be obtained fully and immediately from Guatemala's own earnings. An ample development program thus requires that domestic sources be supplemented by external financing. Present world conditions appear eminently favorable to countries producing raw materials and foodstuffs. Analysis indicates that Guatemala can easily achieve a strong balance cf payments position, even during a period of development, by taking immediate steps toward this objective in both import and export activities. On the import side, the solution does not lie in arbitrary restriction and embargoes, but in stimulating domestic pro- 7 This figure could conceivably be lower for certain types of work (e.g., highway) but it represents the over-all result of experience of the last few years as to the exchange effect of investment expenditures. 288 THE ECONOMIC DEVELOPMENT OF GUATEMALA duction to reduce the necessity for imports of things which the country can produce economically. It is estimated that implementation of the agricultural measures proposed in Chapter II could, at the end of three years, save some three million quetzales in foreign exchange now spent for corn, rice, wheat, milk, hard fiber products and, perhaps, cotton. This can be done without any reduction in the volume of goods available on internal markets. There are other savings of this kind, such as the milling of more imported wheat instead of importing finished wheat flour. An invisible import, the freight-bill, might be reduced if greater competition in inter- national shipping could be obtained. 8 Exports can be increased in various fields. If immediate steps were taken to increase plantings of coffee and cacao, ~10 million in additional earnings might be expected after five years from coffee and an additional ~13 million after 10 years from both commodities. Further exports of essential oils could yield at least one million quetzales and tourist trade perhaps two million quetzales, bringing the total to 013 mil- lion at the end of five years. These figures are no more than rough estimates, but they indicate the substantial potential resources of Guatemala for the future. Nor do they take into account additional potential receipts from bananas, handi- crafts and textiles, meat, minerals, forest products and abaca. Taking into account the whole balance in goods and ser- vices, Guatemala appears capable of obtaining some 16 million in additional dollar resources at the end of five years, without counting possible gains through capital repatriation and sav- ings in external transportation. Any such gains would, of course, be offset to some extent by the increasing imports which result from improved purchasing power and living standards. Internal Financial Policies Despite the promising prospects that have been outlined, the whole purpose of the development program could be frus- trated by a lax internal monetary and fiscal policy. Such a 8 See Chapter V, Recommendations Nos. 30 and 47, and the discussion under Rccom• mendation No. SI.  I FINANCIAL RESOURCES AVAILABLE FOR INVESTMENT 289 policy would endanger the stability of internal prices and the external value of the currency, both of which are essential for the realization of all projects and largely govern the deci- sions of potential investors whether domestic or foreign. In past years there has been a con~tant increase in the money supply. Although fairly stable since 1946, it neverthe- less reached a level of over 060 million during the first months of 1950 compared with 038 million at the end of 1944. Al- though much of this expansion may have been a result of the financing of productive operations, either by the Government or by individuals, it was bound to have unfavorable repercus- sions on the balance of payments. In fact, it has probably been one of the major causes of the reduction in gold and for- eign assets of the Banco de Guatemala, which fell from a peak level of 049 million in 1947 to 037 million at the end of 1950. External and internal stability can, at present, be achieved only if monetary expansion for nonproductive purposes is rigidly controlled. A firm budgetary and monetary policy is necessary to achieve these ends. It is bound to be unpopular in some quarters. The international credit position of Guate- mala would certainly be enhanced, however, if some substan- tial evidence were given that such a policy would be enforced. It may suffice to repeat the warning of the Banco de Guatemala, issued in its report of May 1950: "An inflation could appear which would annihilate social and economic achievements of the recent past." Borrowing Capacity There is little doubt that the productive capacity of Guate- mala, if utilized in some of the ways suggested in this report or in an equivalent manner, would allow it to borrow abroad and service its foreign obligations. It is difficult to place a definite figure on Guatemala's present capacity to service foreign debt. The deficits in the balance of payments over the last several years have occurred even without any appreciable foreign obligations to be ser- viced; at the same time, it has been noted that correction of this situation has begun and that the outlook for an eventual bal- ance of payments surplus is good. 290 THE ECONOMIC DEVELOPMENT OF GUATEMALA Assuming that the other recommended economic and finan- cial measures were carried out, it has been envisaged in Chapter X that Guatemala might borrow abroad to speed up the rate of development. The Mission believes that the maximum level of indebtedness thus considered would be well within Guatemala's capacity to repay. 3. GRANTS AND DIRECT FINANCIAL Am During recent years Guatemala has been receiving direct financial aid and grants in various forms. The amounts have been substantial: over two million dollars were received in 1947, and more than $1.7 million in 1949. These have been chiefly for road construction, agriculture, health and educa- tional purposes. Although in the past two years such aids have decreased with liquidation of several of the services concerned, it is always possible that they might be increased again under favorable circumstances. On the other hand, this is a matter which cannot be decided entirely by Guatemalan policy. As resources, the Mission can take them into account only insofar as they affect certain specific projects, such as the Pan Ameri- can Highway. Apart from this aspect these resources remain secondary in importance, even if by no means negligible in size. VI. Conclusions Summary of Additional Resources For purposes of orientation, it may be useful to summarize here the more significant amounts involved in the preceding analysis. It has been found that additional internal resources available would include approximately eight million quetzales from reorganized taxation, another two million quetzales from improved operation of the Fincas Nacionales, and about one million quetzales from ordinary economies in Government expenditures, or a total of ~11 million annually by the end of the sixth year. Increased coffee output, as recommended, should add two million more quetzales in coffee tax, making  FINANCIAL RESOURCES AVAILABLE FOR INVESTMENT 291 available in all @13 million per year from internal sources by 1956-57. Resources to come from domestic private investment and savings are likely to be small under present conditions and cannot be estimated. Foreign private investment is also prob- lematical, although its total could be quite large if the obstacles described above were removed. The Mission has preferred to leave these resources out of any actual calculations, since they cannot be determined. As has been explained above, as- sumptions concerning borrowing are made below in Chapter X. General Observations on Capital Formation Guatemala's 1947-48 gross national product has been esti- mated at ~335 million (Chapter I). Total capital formation in the same year was estimated at @34.3 million, of which @17.8 million was private capital formation and @16.5 million public. Allowing for a 20 percent increase in the price level since 1948, the 1950 level of gross national product may be put at about @400 million. It is assumed that under the course recom- mended in Chapter II the volume of coffee exports will rise by about 280,000 quintales by 1957. The gross national pro- duct, on this assumption alone, could then be anticipated at • perhaps @417 million. Total capital formation under this assumption may reach @55 million, or 13 percent of the gross national product. Roughly @35 million of this would be public capital formation and @20 million would be in the private sector. Both the over-all rate and the proportion of public capital formation may appear to be high. Yet several favorable fac- tors support the opinion that they are feasible. In the first place, the current high price of coffee affords considerable opportunity to tax private incomes from that source and to increase revenues from state-operated farms . Secondly, the unusually high proportion of government prop- erty in the form of nationalized fincas justifies a somewhat abnormally high level of public investment; this could com pen- 292 THE ECONOMIC DEVELOPMENT OF GUATEMALA sate to some extent for the present deficiency of private investment. Finally, the unequal distribution of national income in Guatemala tends to make it easier to divert resources to invest- ment purposes. ln more developed countries, where income distribution tends to be more uniform and living standards are appreciably higher, any diversion of resources towards investment by taxation or other means is bound to reduce the real incomes of most consumers with all the difficulties in- volved in any such downward adjustment. In Guatemala, on the contrary, the measures that have been proposed here (including the tax increases) will hardly affect the traditional way of life of the great majority of Guatemalans. •  ' CHAPTER X The Recommended Investment Program I. Aims and Assumptions At this point it is appropriate to summarize the financial implications of the numerous recommendations that have been made in the Mission's report and to match these with the financial resources which are likely to be available to Guate- mala for development purposes. An effort to do this will be confined to programs for the next six years (1951-2 to 1956-7), the period for which the Mission has attempted to outline a program of public investment. No attempt will be made to measure in quantitative terms what may be accomplished by private investment. Throughout the report the Mission has suggested fields which could be entered profitably by private investment; but it is impossible, under present conditions, to forecast how much private invest- ment capital will actually become available. This will largely depend upon the success of the measures taken by Guatemalan authorities to implement the recommendations on this subject. It should be kept in mind, however, that any successful public investment program must be closely related to productive activities which attract private investment. For successful planning of economic development it is also essential to take into account the problem of timing. In any relatively underdeveloped country, certain interdependent physical and psychological changes are essential prerequisites to economic progress. Other changes and developments, per- haps more ambitio~s and spectacular, are in fact less funda- mental. For this reason the largest possible segment of the population should feel the direct impact of these first measures, thus stimulating and diffusing the desire for progress. An in- creasing disposition to work, save, invest and take risks, to- gether with a progressive social atmosphere, characterized by a sense of mutual responsibility on the part of labor and management, is vital to any development. 293 294 THE ECONOMIC DEVELOPMENT OF GUATEMALA Such fundamental changes in the traditional, static outlook are not likely to take place without real and widespread im- provements in transportation, communications and power, which create opportunities for enterprise; or without similar progress in health, basic education and technical training, to create opportunities for workers. A number of small but com- plementary improvements in these fields may be much more urgent than a large hospital, a new railway line or other projects designed to secure rapid advances in one field before basic needs have been met in others. This is why, throughout the recommendations, the endeavor has been to maintain a high degree of selectivitY,. The Mission has hoped to focus the limited available resources, by priority, into fields which promise early and cumulative improvements in income and the standard of living, without imposing an excessive strain on the country's ability to maintain a sound balance of payments position. Assumptions Expenditure estimates in this chapter do not cover all national needs. They do cover specific additional requirements for development in those selected spheres of activity which have been examined in preceding chapters. They are made on the assumption that the present level of activities can be sup- ported, in general, by existing sources of funds not included in the Mission's program of additional development projects. The investment programs proposed take into account not only the available funds, but also the ability of Guatemala to pro- vide the necessary skilled labor and technical personnel. Table XXXIII presents an optimum six-year investment program providing for development expe~ ditures of approxi- mately @50 million above the existing level of expenditures. Since the 1948-49 investment in the public sector was roughly ~17 million ( equivalent to ~102 million for a six-year period), our Optimum Program would represent a 60 percent increase over the 1948-49 level of investment. Table XXXIII is based on the assumption that sufficient funds will be made available from abroad to carry out the full THE RECOMMENDED INVESTMENT PROGRAM 295 investment and development program. In 1951-52, the first year, it is estimated that the Government will be able to in- crease its present level of investment by about two million quetzales, using additional revenues from the coffee tax under its proposed redistribution. For the following years of the program, it has been assumed that gradual progress will be made toward the target set for the sixth year, or @13 million above the present level. No allowance has been made for a rise in receipts to be expected from natural growth of the gross national product over the six-year period. In the past six years this growth has occurred at the rate of approximately 2.5 percent per year in real terms; hence, in view of the small sums involved at the beginning of the program, the amount over the six years would not be large. On the other hand it is assumed that, with the measures proposed, coffee exports will begin to increase substantially ·at the end of the fourth year and will reach SO percent above present exports at the end of the tenth year. Consequently the program anticipates additional net revenue of @0.5 million from the coffee tax in the years 1954-55, one million quetzales in 1955-56, and two million quetzales in 1956-57. A total of approximately @41.5 million should thus become available from internal sources for development purposes during the entire six-year period. On this basis, foreign borrowing to the extent of some @20 million would be required, including provision for interest payments of approximately @2.7 million during the first five years. Such an amount would not appear to be out of line with the debt burden that Guatemala could carry under the conditions set forth elsewhere in the report. Assumptions underlying Table XXXIII imply that Guatemala's balance of payments position will enable it to borrow approximately @2.6 million in the fiscal year 1951-52. It should be noted that not all of the @20 million of additional funds required for the full development program would necessarily have to come from foreign loans. If the · balance of payments continues to permit free convertibility of 2% THE ECONOMIC DEVELOPMENT OF GUATEMALA the quetzal, the amount can be reduced to the extent that the Government can cut down expenditures for nonpriority pur- poses, or can collect tax receipts in excess of the estimates. Moreover, limited internal bond issues might prove feasible at some later stage of the development program. Nevertheless, in the optimum investment schedule of Table XXXIII, it is assumed that it will be necessary to borrow abroad the entire amount not covered by anticipated internal resources. Because the most favorable conditions for financing may not be assured, the Mission has prepared two alternative pro- grams based upon modified assumptions. One of these, shown in Table XXXIV, assumes foreign loans of ~14 million; the other, in Table XXXV, assumes no borrowing of any kind. II. The Optimum Investment Program An investment program which the Mission recommends as the optimum under Guatemalan circumstances would involve additional expenditures as described below for each major field. Agriculture Estimates for agriculture are based on the proposed addi- tional expenditures described in detail at the end of Chapter II. The sum of ~1.2 million has been assigned for the first year to cover such items as the following: Research and extension services ... ............................. .. 0 210,000 Mechanization centers .. ...... .. ......................................... . 170,000 Seeds, fertilizers and fungicides ............... . 150,000 Increase in small agricultural credit ............. . 150,000 Small irrigation projects ............................ ... ....... . 110,000 Forestry ....................... ·····················-· ........................ . 80,000 Storage centers .. .... ...... ..................... . 75,000 Faculty of Agriculture (library, laboratory staff) .. 70,000 Other ... .. .................. ... . ............ .. ... . 185,000 01 ,200,000 In the second year, additional expenditures for agriculture reach a peak of ~1.5 million with the opening of a second  .., ~ TABLE XXXIII M 11:1 AssuMPTION No. 1: OPTIMUM INVESTMENT PROGRAM M ('j (in millions of quetzales) 0 a:: Fiscal Years a:: M Item 1951-2 1952-3 1953-4 1954-5 1955-6 1956-7 Total z t:! M t:! Agriculture .............................. .... ............ ................. 1.2 1.5 1.4 1.4 1.4 1.4 8.3 .... z Transport ························ ......... ........................ .... .... 2.0 4.0 5.0 5.0 5.0 5.0 26.0 < M .., u, Telecommunications ........ ........ .................. ........ - .3 .5 1.0 .6 .6 3.0 a:: M Power .... ........ ............... ... .... ....... ......... ...... ..... .. ......... . .2 1.0 2.0 3.0 3.0 2.8 12.0 z .., Irrigation' ................. ......... .. ..... ..... ,................ ........... - - - - 1.0 1.0 2.0 '1:1 11:1 0 C') Health ..... ..... ............ .. ........... .......... ....... ..... ....... ........... 1.2 1.4 1.4 1.4 1.4 1.4 8.2 Total cost of projects ... ........................ .... ........ .... .... - 4.6 - 8.2 -- 10.3 -- 11.8 -- 12.4 -- 12.2 -- 59.5 11:1 > a:: Debt service ........... .. ... ........... ...... ... .............. ....... .... - .1 .3 .6 .8 .9 2.72 Total expenditures .................. .......... .. .. .... ....... ......... - 4.6 - 8.3 -- 10.6 -- 12.4 -- 13.2 -- 13.1 -- 62.2 Internal resources available ............... .. ... ....... ......... 2.0 4.0 5.0 1.5 10.0 13.l 41.6 Loans .. ... .... ...... .. ......... ........ ....................... ............. ... . 2.6 4.3 5.6 4.9 3.2 - 20.6 -- 'Small-scale irrigation projects are included under agriculture. • Rounded total . ~ '-J 298 THE ECONOMIC DEVELOPMENT OF GUATEMALA mechanization center, while other expenditures expand as projects pass the initial stages. In subsequent years, such expenditures are stabilized at ~1.4 million. Transportation In Table XXXIII, two million quetzalas have been assigned to transportation for the first year. This includes ~500,000 for surveys and planning. The remaining ~1.5 million can be used to advantage for additional construction work on the Pan American Highway near the Mexican border and for paving the relocated Guatemala City-Escuintla section of Route 3. Transportation expenditures indicated in Table XXXIII for subsequent years assume that such amounts will be avail- able for additional construction, over and above a normal highway budget of four million quetzales. Of the latter, two million quetzales are normally available for construction and two million quetzales for maintenance. The Mission envisages an over-all transportation construc- tion program, as set forth in Chapter V, of approximately ~56 million. The optimum investment schedule, based on estimates of what may be financially and physically possible, provides for the expenditure of ~26 million on additional construction, plus ~12 million from the present annual' high- way budget, making a total of ~38 million. This leaves a deficiency of some ~18 million on the total program. The construction represented by this figure would have to be left until after the completion of the six-year program. The total highway program presented in the report, therefore, repre- sents in reality, a IO-year program. Telecommunications Provision is made in the optimum program for additional expenditures of three million quetzales on certain internal telecommunications for which private enterprise is unlikely to provide funds. These include expansion of the Guatemala City system, rebuilding of the Quezaltenango system, and expansion and modernization of the long distance lines and THE RECOMMENDED I .N VESTMENT PROGRAM 299 plant. It is assumed that, in the first year, @50,000 will be provided from the regular budget for surveys and plans. Pub- lic funds will have to be provided thereafter as follows: 2nd year-@300,000 to extend the Guatemala City sys- tem and to begin the rebuilding of the Que- zaltenango system; 3rd year-@500,000 to continue the program begun in the second year; 4th year-@1,000,000 to complete the extension of the Guatemalan City system and rebuilding of the Quezaltenango system, plus extension and modernization of the long distance plant; 5th and 6th years-@600,000 in each year for extension and modernization of long distance lines and plant. This program does not provide any funds for the local telephone systems in smaller urban centers. It has been assumed that such needs, if sufficiently urgent, may be taken care of by private or local initiative. In any event, !he needs of these small towns would not warrant a sufficiently high priority to include them in a very selective investment program. Power In Table XXXIII, a total of @12 million has been assigned for hydroelectric development as follows: 1st year-@200,000 for surveys and plans of the Samala River (Santa Maria and La Dicha) projects, the Lake Atitlan project and possible projects in the Guatemala City area; 2nd year-@1,000,000, of which @200,000 would be spent on continuation of another plant (probably at construction of another plant (probably at La Di cha) on the Samala River; 3rd year-@2,000,000 to be spent if technical conclu- sions warrant, in initiating a large-scale proj- ect at Lake Atitlan or, alternatively, upon further projects on the Samala River, plus 300 THE ECONOMIC DEVELOPMENT OF GUATEMALA the initiation of construction of power proj- ects in the Guatemala City area; 4th and 5th year-Continuation of projects initiated in the third year ; 6th year-Completion of projects under way at the end of the fifth year. On this basis, no public funds will be available for power development in other parts of the country. Any such develop- ments will therefore have to be financed either from the normal budgetary appropriations or by private interests or municipalities. Public Health Proposed expenditures in the field of health are based on estimates given in Chapter VIII. The sum of ~400,000 per year has been included for DDT-spraying in the malaria eradication program. No allowance has been made for present budget expenditures, because the contributions made in former years by the Inter-American Cooperative Service on Public Health ai'e not being continued. The cost of a minimum permanent sanitation campaign has been estimated at ~1.5 million per year, for 20 years From this has been deducted one million quetzales, which is at present being spent in all fields of preventive medicine. Therefore, the normal additional expenditure under the pro- gram will be ~500,000. For the first year, however, it is felt that not more than an additional ~300,000 could be efficiently used in malaria eradTcation, safe water supply, and related plans and surveys. To these figures has been added a total of ~2.5 million, distributed on the basis of ~500,000 a year for five years, for completion of construction and equipment of the Roosevelt Hospital. III. The Reduced Investment Program The reduced investment program set forth in Table XXXIV is based on the assumption that Guatemala will be  '"l ~ t'1 TABLE XXXIV :,:I A ssUM PTION No. 2 : THE REDUCED PROGRAM (with borrowing of 014 million) t'1 (') (in millions of quetzales) 0 a:: Fiscal Years a:: t'1 Total Total z t:, Item 1951-2 1952-3 1953-4 1954-5 1955-6 1956-7 possible desirable t'1 t:, .... Agriculture ... ............... ..... ..... ....... .. .... .9 1.5 1.4 1.4 1.4 1.4 8.0 8.3 z < t'1 Transport ........................................... .4 3.8 5.0 5.0 5.0 5.0 24.2 26.0 <Jl '"l Telecommunications .. ..... ........ ...... .... - .3 .4 .4 .5 .6 2.2 3.0 a:: t'1 z Power .... ........ .......................... .1 1.0 . 2.0 3.0 3.0 2.9 12.0 12.0 '"l "d Irrigation ........ .. .................................. - - - - - 1.0 1.0 2.0 :,:I 0 C'l :,:I Health ................................................ .6 .9 .9 .9 .9 .9 5.1 8.2 > Total cost of projects ........... .. ... ..... -- 2.0 -- 7.5 -- 9.7 -- 10.7 -- 10.8 -- 11.8 -- 52.5 -- 59.5 a:: Debt service ...... .......... ..... ................. - - .3 .6 .9 1.1 2.9 Total expenditures ........... -- 2.0 -- 7.5 -- 10.0 -- 11.3 -- 11.7 -- 12.9 -- 55.4 Internal resources available .......... 2.0 4.0 5.0 7.5 10.0 13.0 41.51 Loan ................................................... .. - 3.5 5.0 3.8 1.7 - 14.0 --- 1 Discrepancy due to rounding. - ~ 302 THE ECONOMIC DEVELOPMENT OF GUATEMALA able to borrow from abroad to the extent of 014 million- after attaining at least an equilibrium in her balance of pay- ments-and that such a loan will become available by the end of 1952. Reductions from the optimum program have been effected as explained below. Agriculture In the first year the optimum agricultural program has been reduced by 0300,000. This means a reduction of additional expenditures on small agricultural credit, 0150,000; irrigation, 0100,000; seeds, fertilizers, fungicides, 050,000. Transportation There is no basic alteration of the optimum transportation program: In the first year, however, only 00.4 million could be provided for surveys, abandoning immediate additional expenditures on the Pan American Highway and Route No. 3. In the second year, a reduction of 00.2 million would be obtained by postponing the construction of an additional warehouse in Puerto Barrios. Telecommunications The optimum program of three million quetzales in this field is reduced by 00.8 million over the period of six years. This involves a postponement in rebuilding the Quezaltenango system, and curtailment of the work on the long distance plant. Power The power program is left intact at 012 million, with a reduction of 0100,000 in the amount spent on surveys in the first year, to be compensated in following years. Irrigation Only one million instead of two million quetzales is made available for irrigation. Health A substantial reduction of 03.1 million of health expendi- tures is involved. It is necessary to eliminate all expenditures THE RECOMMENDED INVESTMENT PROGRAM 303 on the Roosevelt Hospital, and to spend in the first year only ~200,000 instead of ~500,000 on the permanent sanitation campaign. IV. The Pay-As-You-Go Program In the event that no foreign borrowing could be arranged, Guatemala would have to rely entirely on new resources coming from the budget, created as a result of the recom- mended reforms in taxation, public finance and operation of the Fincas Nacionales. On this basis, only ~41.5 million would be available for development expenditures during the entire six-year period, compared to the total of ~59.5 million under the optimum and @52.5 million under the reduced program. Agriculture With respect to agriculture, the program of Assumption No. 2 has been maintained because of the essential character of this sector of the economy. A high priority has been given to expenditures for agricultural machinery, research equip- ment and breeding stock during the first year. Transportation In the field of transportation, a drastic reduction will be necessary for the first three years, as compared with the optimum investment. The sum of @400,000 has, however, been assigned to the first year for surveys and the preparation of plans. In the last two years it has been possible to assign the maximum additional amount of five million quetzales to transportation. Telecommunications Any expenditures for telecommunications, in the first four years, will have to be financed from the current budget. In the last two years ~900,000 are allocated; most of this will probably be needed for over-all planning and for expansion of the Guatemala City telephone system.  w TABLE XXXV $2 AssUMPTION No. 3: THE PAY-As-You-Go PROGRAM (no borrowing) (in millions of quetzales) --- Fiscal Years Total Total Item 1951-2 1952-3 1953-4 1954-5 1955-6 1956-7 possible desirable ..,i ~ t'1 Agriculture ... .. ...... ..... ........ ..... ... ............. .9 1.5 1.4 1.4 1.4 1.4 8.0 8.3 t'1 (i 0 Transport ........ .. ..... ........ .. ........... ........ .... .4 1.8 2.9 4.0 5.0 5.0 19.1 26.0 z 0 - ... ~ Telecommunications ..... ... ....... ...•:.......... - - - .3 .6 .9 3.0 (i i::, t'1 Power ................. ........... .. ... ....... .......... .... .1 .1 .I 1.5 2.5 4.1 8.4 12.0 < t'1 r 0 Irrigation ......... ... ..... ... ......... ...... ..... ... .. .. - - - - - 1.0 1.0 2.0 "ti ~ t'1 Health .......... ...... ...... .. ..... ..... ..... ... .... .. .... .. .6 .6 .6 .6 .8 .9 4.1 8.2 z Total ..... .. ...... .. .... .... ..... ... -2.0 - 4.0 - 5.0 -7.5 -- 10.0 -- 13.0 -- 41.5 -- 59.5 ..,i 0 "l C1 c > ..,i t'1 ~ > r > THE RECOMMENDED INVESTMENT PROGRAM 305 Power In the field of power development, it has been found possible to make provision only for detailed studies during the first three years, for which ~100,000 per year are assigned. Construction would not begin until the year 1954-55, with substantial increases during the final two years. •Irrigation No funds could be spared for major 1rngation projects until the final year of this program, when one million quetzales would become available. Health Expenditures for completion of the Roosevelt Hospital were eliminated in the reduced program. Further drastic re- ductions in public health expenditures would be necessary in the first four years. Even within the very limited program possible, malaria control and sanitation work in the Pacific lowlands should be maintained at a comparatively high level, since they are essential for the increased production of agri- cultural foodstuffs and raw materials in that region. It is only too apparent, from a comparison between the "possible" and the "desirable" expenditures shown in Table XXXV, that the development program would have to be significantly curtailed if no financial aid could be obtained. Both the highway and power construction programs would suffer seriously. ' The three programs presented, together with their assump- tions, are intended to represent no more than rough bases for refinement. The Mission hopes, nevertheless, that they can serve as a starting point in the Government's own efforts toward sound economic development and a higher level of living for the people of Guatemala.