Why is Guatemala’s low social investment a problem?
Why is Guatemala’s extremely low spending on public programs and social investment a problem? In short, it increases poverty and hurts competitiveness. Due in large part to lack of social spending, poverty in Guatemala has been increasing, and this has macroeconomic consequences.
According to the World Bank’s 2014 Guatemala’s Economic DNA report, Guatemala’s “lagging” GDP shows that its economy has not been keeping up with the global economy or even that of its neighbors.
Graph 1, called “Annual GDP growth by percent,” shows data for Emerging markets (Mercados emergentes), Central America, and Guatemala. The second shows GDP per capita in US dollars adjusted with Purchasing Power Parity (PPP). (PPP is a method that converts different currencies to US dollar value based on their local value relative to basic goods, not based on exchange rate.)
The UN’s Economic Commission for Latin America and the Caribbean (ECLAC) explains in a 2017 report that social investment that “is a crucial tool for increasing competitiveness of private industry and favoring human development. In Central American countries with less developed infrastructure, like Guatemala and Nicaragua, the creation of public capital [public infrastructure like roads and ports] is key to taking advantage of strategic advantages [in resources and location] and to bringing development to different parts of the countries.
For its part, Guatemala shows one of the lowest levels of investment in the world.”
(Social spending refers to spending for the future, such as on roads and other infrastructure, while social spending refers to spending for the present, like on teachers’ salaries, welfare programs, or electricity subsidies.)
This is why the World Bank’s Guatemala’s Economic DNA report found that Guatemala’s middling infrastructure rankings are falling, according to the following chart:
Quality of infrastructure: Roads, Trains, Ports, Airports.
Social spending is also key to improving worker productivity and economic activity.
This graphic from ECLAC’s 2017 “Consensus and conflict in Latin American fiscal policy” report explains the positive economic impacts of different kinds of social spending (translation below):
Examples of the economic impacts of social sectors
Social sector / Examples of economic impact
The theory of human capital is the principle legal framework through which it is evident that education has economic impact. Education encourages worker productivity, making workers skilled and better suited to the labor market, which has an impact on economic growth.
Investment in health generates growth in productive capacity, with benefits for individuals and organizations.
Food security and nutrition
Both malnutrition and overweight/ obesity create personal and social costs, which means that reducing them implies direct savings for national economies in health, education, and, above all, productivity. Action to reduce these also means incentivizing crucial sectors of the economy, like production and distribution of food products.
Social protections (i.e., social security, unemployment benefits)
Assuring a base level of economic security for people, and mitigating the effects of economic crises or unemployment, facilitates a basic level of consumption in the population, through an injection of resources directly into the market by way of increased demand. Further, it has a direct effect on employment. Among its functions is the regulation of the labor market and the promotion of good-paying jobs.
The protection of the environment can have an economic impact through the application of strategies that contribute to reducing contamination. There is also an impetus for the construction sector through the retrofitting/“greening” of homes and buildings.
Housing and related services
The indirect impacts of spending on housing stimulate the construction sector, which accounts for an important part of regional GDP. The public sector creates alliances with the private sector to undertake infrastructure and homebuilding projects.
Culture and recreation
The production of cultural goods and services generally leads to increased private enterprise, through, for example, the salaries paid by private businesses.
The importance of “social protections” like social security and unemployment benefits are shown in the below graphs from the World Bank’s Guatemala’s Economic DNA report. They show that consumption accounts for the vast majority of Guatemala’s GDP, meaning that economic crises or sudden unemployment can easily cause GDP to drop if consumers find themselves empty-handed.