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DANIEL ARTANA, SEBASTIÁN AUGUSTE, AND MARIO CUEVAS
The analysis also suggests that Guatemala needs to improve governance and strengthen the rule of law, fight corruption, and tackle violence and organized crime. In other words, it needs to provide higher quality public goods, which, in turn, would increase private returns to capital on a risk-adjusted basis, thus boosting economywide investment. But the government is not able to collect enough resources to provide an adequate level of public goods to complement private capital. This discourages private capital accumulation. The meager supply of public goods also reduces incentives to enter the formal sector, thus enlarging the ranks of the informal sector, which makes it even more difficult for the government to collect taxes. How can the government increase the supply of public goods if it cannot collect enough resources to invest? Guatemala is now constrained by decades of underinvestment and political turmoil. Most of the badly needed reforms and investments do not mature in the short run and relatively long waiting periods are required to see any effects on growth. Unfortunately, it is hard to improve the business environment and quality of governance with such a poor human capital base—a situation that creates another vicious cycle. Guatemala has implemented policies to favor investment in industries intensive in unskilled or semi-skilled labor, the maquilas, but these steps have not been enough to revitalize the whole economy. The very high returns to schooling show that the economy is demanding better-educated people. Could this be a starting point, a first priority for reform? The challenge remains: how can the government invest in human capital if its fiscal constraints are severe. It is tempting to call for more taxes, but this is what Guatemala has tried since 1996 with little success (through a series of Pactos Fiscales). In turn, it could be claimed that the answer is enforceability (of taxation), but weak enforcement is a direct result of the quality of government, which also needs to be improved. It appears that, even if reforms can be prioritized on lifting the constraints that hinder economic growth the most, it does not follow that the optimal reform sequencing is likely to be politically viable.