2009 Index of Economic Freedom

Quick Facts

Population:

• 13.0 million

GDP (PPP):

• $67.4 billion
• 5.2% growth
• 3.6% 5-year compound annual growth
• $5175 per capita

Unemployment:

• 3.2%

Inflation (CPI):

• 6.8%

FDI Inflow:

• $353.7 million

Guatemala's economic freedom score for 2009 is 59.4, making its economy the 87th freest in the 2009 Index. Its score decreased by 0.4 point, reflecting slight declines in four of the 10 economic freedoms. Guatemala is ranked 18th out of 29 countries in the South and Central America/Caribbean region, and its overall score is nearly equal to the world average.

Guatemala has achieved steady economic growth of around 4 percent over the past five years and has a relatively strong record of sound fiscal and public finance management. Its public debt remains one of the region's lowest. Personal and corporate tax rates are moderate, and overall tax revenue is relatively low as a percentage of GDP. Government expenditures are low. The government welcomes foreign investment and generally gives foreign investors national treatment.

Guatemala scores poorly in business freedom, property rights, and freedom from corruption. Bureaucratic impediments persist, and licensing procedures are burdensome. The judiciary is not an effective arbiter of cases, and corruption is extensive.

Background Back to the top

About 80 percent of Guatemalans live below the poverty line, less than half of all age-appropriate youth are enrolled in secondary schools, and nearly half of the labor force works in agriculture. The most advanced sector, telecommunications, was fully deregulated in 1996. The Central America–Dominican Republic–United States Free Trade Agreement, ratified in 2005, should boost trade and employment. Leading exports include coffee, sugar, bananas, winter vegetables, and cut flowers, as well as maquila textiles. President Alvaro Colom of the left-of-center National Unity for Hope Party was elected in 2007 and promises a program of social democracy, accelerated rural development, improved education, and access to health care. Ongoing issues include participation in Petrocaribe (Venezuela’s long-term oil loans and subsidies program), high crime rates, the financing of populism, rising youth gang membership, and a weak and corrupt judiciary.

Business Freedom 54.1 Back to the top

The overall freedom to conduct a business remains restricted by Guatemala's regulatory environment. Starting a business takes an average of 26 days, compared to the world average of 38 days. Obtaining a business license requires more than the world average of 18 procedures and 225 days. Closing a business can be difficult.

Trade Freedom 78.4 Back to the top

Guatemala's weighted average tariff rate was 5.8 percent in 2005. Non-transparent and inconsistent administration of regulations, limitations on services market access, occasional inconsistencies in customs valuation and administration, and infrastructure limitations add to the cost of trade. Ten points were deducted from Guatemala's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 79.4 Back to the top

Guatemala's tax rates border on the burdensome. The top income and corporate tax rates are 31 percent. Other taxes include a value-added tax (VAT) and a tax on interest. In the most recent year, overall tax revenue as a percentage of GDP increased slightly to 11.9 percent, reflecting efforts to improve tax administration.

Government Size 93.5 Back to the top

Total government expenditures, including consumption and transfer payments, are low. In the most recent year, government spending equaled 14.7 percent of GDP. The ratio of public debt to GDP remains one of the lowest in the region. State ownership of enterprises is not extensive, but privatization has been slow.

Monetary Freedom73.3 Back to the top

Inflation is relatively high, averaging 7.0 percent between 2005 and 2007. The government maintains few price controls but subsidizes numerous economic activities and products, such as fuel and housing construction. Ten points were deducted from Guatemala's monetary freedom score to adjust for measures that distort domestic prices.

Investment Freedom50.0 Back to the top

Guatemala grants foreign investors national treatment and allows full repatriation of profits. Domestic and foreign firms must register with the Ministry of Economy to incorporate. Foreign firms are subject to additional requirements. Licenses to foreign investors to provide professional services are restricted, as is foreign ownership of domestic airlines, newspapers, commercial radio stations, mining and forestry, petroleum operations, and real estate. Time-consuming administrative procedures, arbitrary and opaque bureaucracy, and corruption impede investment. Residents and non-residents may hold foreign exchange accounts. There are no restrictions or controls on payments, transactions, and transfers. Foreign investors may not own land immediately adjacent to rivers, oceans, or international borders.

Financial Freedom50.0 Back to the top

Guatemala’s small financial system is dominated by bank-centered financial conglomerates, and banking has undergone extensive and drastic reorganization. Banco de Café, once one of the top four banks, was suspended in 2006 for failure to meet capital requirements, and over 90 percent of the bank accounts were liquidated as of September 2007. Banco de Comercio was suspended in January 2007. The banking system remains stable overall because the two failures were managed effectively. In 2007, Guatemala had 22 commercial banks, and the five largest controlled about 77 percent of total assets. About 17 non-bank financial institutions perform primarily investment banking and medium-term and long-term lending. Foreign borrowers can secure domestic credit, but their reliance on the local credit market is generally rare. Bank supervision and transparency have been strengthened under a legal and regulatory framework adopted in 2002, as well as legislation passed in 2005 and 2006, which also makes government intervention easier. Capital markets are small and not fully developed. Two commercial exchanges deal almost exclusively in commercial paper and government bonds.

Property Rights30.0 Back to the top

Judicial resolution of disputes is time-consuming and often unreliable. Civil cases can take as long as a decade. Judicial corruption is not uncommon. Land invasions by squatters are increasingly common in rural areas, and evicting squatters can be difficult. Successful prosecution of intellectual property rights cases is rare.

Freedom From Corruption28.0 Back to the top

Corruption is perceived as widespread. Guatemala ranks 111th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Corruption is serious at many levels of government. Guatemala ratified the U.N. Convention Against Corruption in November 2006, but corruption remains pervasive in customs transactions, particularly at ports and borders away from the capital.

Labor Freedom57.3 Back to the top

Guatemala's rigid labor regulations hurt overall employment and productivity growth. The non-salary cost of employing a worker is moderate, but dismissing a redundant employee is relatively costly. The cost of laying off a worker is a disincentive to job growth.