A Discussion with Fernando Paredes, Interim Director, World Bank Guatemala

With: Fernando Paredes

January 19, 2016

Background: Fernando Paredes now works for the World Bank in Guatemala, after a long career focused mainly on Latin America and especially Guatemala. He reflects on major challenges facing Guatemala, including electricity generation, land reform, and government leadership. He worked both for the Planning Secretariat and for the Social Investment Fund and highlights insights from this experience, notably the difficult efforts to achieve land reforms. He highlights the challenge of uncoordinated and often creative Catholic Church efforts to fill gaps that result from poor governance. This discussion between Carlos Martinez Ruiz and Fernando Paredes on January 19, 2016 was part of Berkley Center/WFDD research on religious dimensions of Guatemala’s development.
Could you tell us how you came to your current position?

I currently serve as the interim director of operations for the World Bank office in Guatemala. I studied economics; my specialty is social evaluation of projects and social project evaluation. I initially worked for the Social Investment Fund [Fondo de Inversión Social, FIS] on economic planning and rural and social development. I had the opportunity then to visit almost all Guatemala’s municipalities, looking at project development of all kinds, ranging from education to healthcare. This was before the Peace Accords were signed. I also had the opportunity to work on economic planning for the energy and mining sector with the Secretariat for Economic Planning [Secretaría de Planificación Económica, SEGEPLAN]. My job was essentially to prepare the inventory of projects that were to be submitted for consideration for external cooperation when the Peace Accords were signed.

I then worked for a time in the private sector. Given my interest in development projects to advance my country, after the signing of the Peace Accords I got involved in agrarian issues, particularly the funding of land reform. For seven years, I was director of a project financed by the World Bank. My role was to manage a social fund to develop productive infrastructure for groups of farmers who had agreed to borrow to buy land under the institutional framework created after the Peace Accords. When that project ended, I began working for the World Bank. In fact, this occurred exactly a week ago.

In SEGEPLAN, what was the focus of your work?

When I worked for SEGEPLAN, we were still at war. We had experienced many problems that had damaged much of the energy infrastructure, and due to security issues, there was tension: investments in the energy sector slowly declined. There was a consensus among the politicians and think tanks that was very much in line with the consensus in Washington: that some kind of profound reform needed to take place in Guatemala. Among the sectors best suited for privatization was the energy sector. That is when the discussion began about which model to follow. In the case of Guatemala, they ended up following the Chilean model.

You refer to damage to the energy sector in Guatemala. What did that involve?

There’s the matter of hydroelectric plant construction, the expansion of transmission networks, and energy distribution. Remember that at that time, in 1991 and 1992, the nation depended heavily on the Chixoy hydroelectric plant. Two years of drought were already wreaking havoc; and it reached a point in 1992 and 1993 when there was energy rationing because the dam was not producing enough. We were looking for alternatives and fixed on bunker generation. It was a very costly process, but it was the quickest thing that could be invested in.

What is bunker generation?

In this case, they acquired what were called barcazas, mobile plants that generated energy through the use of bunker. These were incorporated very quickly into the system, but obviously because of the emergency situation and the costs of gas, it was a very expensive way to generate energy. That’s when they started to consider how the system could work better: on one hand thinking about privatization and the development of a legal framework that would bring in new actors, and on the other state investment in some specific projects like rural electrification. This was in 1993, but it’s only been within the last five years that we’ve seen the impact on the energy market. There is now more diversity among the actors. The energy matrix has changed, and next year there will probably be only one operator that will generate more than Chixoy generated. The expansion of the transmission networks is nearly complete, which will make energy distribution much more reliable.

The concern about cost is always debatable; there is a recent argument about how much to subsidize small users. The truth is that there has been a lot of progress. When it comes to deficits, when it comes to generation and consumption, these are no longer fundamental concerns. The issue now is how Guatemala can truly become an energy exporter for Central America, which comes with legal challenges. A certain percent of the rural population constantly demands nationalization of electricity. I think this has already reached a point of no return with so much investment. There are many variables, including reducing poverty by access to basic services, but also being able to generate investment with more reliable electricity.

What is clear now that wasn’t clear before is that the issue of generating foreign investment and rural economic growth to help create jobs is not a one-variable equation. In other words, energy was only one component; other influential factors have to be addressed one-by-one. Failure to do so means that the necessary conditions to attract foreign investment that would create jobs have not been met. Poverty has been reduced to some extent by tending to basic needs, but as time goes on, it is clear that only increasing incomes and improving education and healthcare can reduce poverty. But job creation moves very slowly. Data on rural poverty rates and urbanization collected for the national plan (Plan K'atún) show a larger urban population than rural population. This indicates that wealth creation in urban areas requires another kind of intervention that is not necessarily being addressed quickly.

And investment in rural areas is extremely expensive. Bringing quality education to a town with 20 children is very costly and requires innovative alternatives that are not necessarily as efficient as when there are 300 or 400 children in an urban area. The same applies for healthcare and energy access; the places that don’t have electricity coverage are marginal areas where investment is much more expensive, because you are putting up power lines that benefit 20 or 30 families. With income creation, you encounter the same issues: helping 20 farmers produce something and integrate themselves into the market is very costly. Future governments will need to think about what type of urban investments are feasible. This doesn’t mean that they should forget about agriculture, since this is where the highest poverty rates are, but they need to anticipate a situation where there will be migration to urban centers.

So the principal sources of energy are hydroelectricity and bunkers?

There is one hydroelectric plant, and a solar plant is being expanded. Other sources are being used that are not fully in operation yet, such as coal, but the use of bunkers has been declining. They also intend to build small hydroelectric power stations. Renewable energy now carries more weight than nonrenewable energy and fossil fuels.

Tell me more about your time with FIS!

After SEGEPLAN, I moved on to FIS. It was a radical change, because I went from sitting behind a desk thinking about big investment plans to an organization that worked on small, one-on-one projects. We worked with hamlets and villages. One gets to know the other Guatemala, which is terribly affected by poverty and by people’s desire to better themselves. We are talking about a period after 30, 40 years of war when there was a very weak state. There is a totally forgotten population that has to be recognized.

What regions were you working in?

We were working across the nation. There were 333 municipalities at that time, and I kept a register of each time I visited a municipality. When I left the position, there were less than 10 municipalities that I had not visited. Despite the ceasefire agreements, we were still at war. We were intervening with water, education, healthcare, community pharmacies, irrigation, and supply stores; but they were all relatively small interventions, with the biggest project being 1 million quetzals. There were a variety of projects that ranged from the construction of a classroom to silos for people to store for daily needs. Some of the projects were successful, but others got into the system when another structure should have taken them on. The concept of helping people adjust was not very present during that period, and it was assumed that many things would happen through inertia.

The fund was to be a temporary intervention, though it was drawn out for a long time before it finally closed. However, it did have an impact. For example, the deficit in classrooms was taken care of in an incredible way, but then they needed teachers, they needed tools, they needed quality teaching. An education self-management program was added in the early 2000s, but unfortunately, it was later taken over because the employees, instead of being contracted by the parents, became part of the Ministry of Education, which brought in the unions.

And to this day, the country has a very high illiteracy rate, is that right?

The problem is no longer illiteracy per se, because there are municipalities that have been declared illiteracy-free. The issue now is functional illiteracy, where you learn to read but you never apply the skills. When you look at education coverage and evaluations of quality of education, it is very clear that there are terrible deficiencies at the private schools, inner city schools, and rural public schools. The quality of education is horrible, with many contributing factors.

In terms of the environment, what challenges did you see working for FIS?

At that time, the idea was to get the environment on the agenda, on people’s minds. It wasn’t something that was necessarily present; people had other concerns and priorities. There was an environmental agenda, although not particularly well-developed, from the late 1990s, funded by NGOs. The legal framework began to appear in the late 1990s. There was an institutional framework, but it was very weak, with few resources; those involved were essentially processing agents. For example, I need an environmental impact license to be able to develop some kind of investment, like a subdivision. This takes scarce resources, leaving very little for planning.

This is where the legal framework comes into play: requirements and deadlines consume both resources and interest. In terms of deforestation, water contamination, and solid waste management, very little has been done, and we are in a situation where, instead of getting better, we are getting worse. If you go to a municipality in a remote areas and start a dialogue with the community, and you tell them that solid waste treatment involves a cost because you are going to recycle or move the disposal site, it will be a source of conflict. Not everyone is going to be willing to pay even one quetzal more for waste removal services. Then the trash collectors multiply.

These are issues the municipalities don’t want to get involved in for fear of large-scale political blowback. For example, when the Coatepeque government tried to regulate and strengthen a service that had previously been free, there were large, violent protests. In the end, the local governments have to pull back and make the decision to either absorb those costs with their resources or not address the issue. As long as we don’t have the resources to address primary needs, we are never going to be able to address issues that, however important, are not worth it politically.

Historically in Guatemala, was there a communal land system? How were land rights allocated? Has there been any kind of agrarian reform besides the Arbenz attempt?

The situation is problematic and changing. There was the original sin of expropriation, a reform based on the expropriation of idle land. That was already a mortal sin. Today even mentioning something along these lines will lose credibility with the population.

This is a very conservative country, and agricultural issues are very complex. It goes back to the conquest regime for one basic reason: the lack of precious minerals in Guatemala that could be easily extracted. The only way to generate wealth was through agricultural production. But agricultural production, to be profitable, required mechanisms that amounted almost to slavery and that had the effect of creating patterns of land distribution that were violent, because it was a conquest, removing land ownership. No one held land except according to where they lived or their ethnicity at the time the conquerors arrived. A model of land ownership developed that changed over time.

Moving to the coffee reform in 1870, a major expropriation process benefited the Church. Then there is the issue of the two world wars when one president encouraged a German immigration policy. Some accounts claim that this was literally to improve the race—there are written accounts, and people still say it. But it was World War I that led to taking property to give to the Germans, which was returned after World War II, then removed, then returned. In the middle came the Arbenz reform, and after Arbenz came a process called agrarian transformation—that is, the granting of land that had no owners. But the process was long, inefficient, and corrupt. Which takes us to the time of the signing of the Peace Accords, when there was a recognition that many people had possession, but not ownership, of land.

The idea was to regularize land tenure, with procedures based on possession that gave people legal certainty, on the assumption that this legal certainty is necessary for long-term investment or to contract a mortgage. In practice these assumptions were wrong, and the impact was that for four to five years there was no investment in farms. That led to the coffee crisis, because the coffee growers who were already uninterested in managing their properties ceded them to the Land Fund, and thus to peasants who could buy them. It was not the world’s best coffee. We could talk for hours about why that model failed, but I would argue that it failed because all were guilty, from the peasant, the indigenous and peasant organizations that agreed to the model. Basically they had different objectives, and they knew that sooner or later, no government would ever force them to repay their loans. And that is just what happened, with nearly 80 percent debt forgiveness. More than the half the original beneficiaries are not on the farms. Thus the model failed completely.

The model has worked in other countries, giving access to the land to the poorest on concessional terms. But this model of access to the market, or assisted access to markets, generally worked for peasants who were not the poorest, who already were able to hire people, who had certain new business skills, and had the vision to produce not for subsistence, but to enter the market. They require specific technical assistance and some working capital, but they are willing to pay. The problems came when the model was applied to everyone. Looking for simple answers gives a poor and expensive model. The poorest were unable to pay, and the development process we are talking about was delayed for 10 to 15 years. The model failed, and the agrarian problem is still with us, even if somewhat toned down.

There are lessons here. One is the land was not the way to create wealth. It is indeed important, part of the equation, but it was not "the" single instrument. We must also understand that the Guatemalan vision is very conservative. Let’s leave aside farms that were seized through violent means; that occurred, in significant numbers, but cannot be generalized. We are looking at mechanisms to give people access to land, probably through renting or leasing land. What is most important is to have land, with access that allows a peasant to continue subsistence production, and there is impact. We recognize that there is still poverty, and that probably requires other measures. Where natural and social conditions allow certain properties to make profits, that needs a firm, steady, and sustained state policy beyond what the government now has. We have yet to find political, rather than the macroeconomic, solutions that are sustainable over time. So you have to go back to the drawing board on that topic.

What are the current land concentration levels?

Guatemala has a range of land problems, including the dynamism in the land market, and the fact that these groups have access to credit through organizations; they form an association that owns the land. If you go to the property registry and look for property per capita, the situation is blurred because the property doesn’t belong to individuals, but to an organization. Thus, the basic procedure is to divide the land by number of inhabitants, but you also have to subtract urban migration. The GINI coefficient continues to show great inequality, particularly because there’s expansion of big areas like sugar cane and African palm. That’s not to say that sugar cane and African palm are bad; what I’m saying is that when the farming of these crops spreads, by definition it affects the concentration of inhabitants so that people have less land. If a big landowner has acquired vast stretches of land that may address the issue of poverty via job creation. Land property concentration must be the most extreme in Latin America.

What are the current vulnerabilities or challenges from your perspective?

The greatest vulnerability is income. People should have a decent income. Society needs to understand a few things. First, the means, and I mean lawful means, do not matter in the sense that it can be through a job, through production, through offering a service, but the point is to create income. I am not talking about unfulfilled basic needs—there is still a lot to be done there. For example the dry corridor is a structural problem, but people still live there.

What is a dry corridor?

A strip in which there is a perennial drought and famine and thus hunger and malnutrition and other problems like poor health. Wherever that happens, all want to play the role of the good Guatemalan, so we donate a pound of beans, a pound of corn. This is a recurring theme every year. We need to understand and focus on what will really help the people in those areas, or find a way for them to generate income. This involves self-subsistence and then monetization. But let's say that is an exception. The point is: how to you generate income for people?

Sometimes you can get an inside perspective which, of course, is not systematic or empirical, but there is a youth that is ready, in contrast to years ago, to migrate. This did not occur years ago when people stayed on their plot of land—hence the phenomena of land fragmentation. Young people now are willing to migrate and to get a job.

The issue is how to generate income. That is important, but at the urban level, the opinion-formers of middle and upper-middle class must understand that Guatemala is not only the city, and that poverty is not what anyone desires. That alters the perception of what the state can or cannot do, and how I contribute to how the state does it. The challenge is to understand that four lane highways that transport products to a port and make them more competitive do not benefit exclusively the private sector. There are mechanisms that ensure that producers that have a market share pay more because they have better access. We need to work on that. But people must also understand that building a road to a group of farmers is important; they may need to walk 20 hours to get to an urban center to sell their product, and with a road, even if it is not paved, the time is cut to six hours, and resources are not wasted.

The state needs a vision. Guatemala faces a complex situation, not so different from other countries, but, like any country, it is complex. If we do not appreciate our situation we will never find a solid solution, even if by luck we were to satisfy everyone. We must appreciate the principle of subsidiarity: the state must work for the overall welfare of the country, but not tend to each individual need, nor each political act, but with impact.

The greatest challenge is to understand that we need everyone to get out of poverty, that poverty damages us all, and to work for an efficient state, an efficient government. That means that with an 11 percent tax burden we will never get anywhere. At the same time we need to be vigilant that resources are used well. Happily we have now taken a first step towards a situation where there is no corruption, or at least it is not so extreme. Let's say that we have taken that step, with a long way to go to reach the point where not only is there no more corruption, but resources used have impact. Because building a stadium rather than a water project may not necessarily be corruption but a problem of priorities, even assuming that the stadium is built at an affordable cost. That is the greatest challenge and a core condition for dialogue.

Two things have special importance there: to avoid asymmetries of information in dialogue, thus both parties to the dialogue need to be informed, and further to ensure that no one side can impose its will on the other. If I feel I am in a genuine dialogue I will be willing to give something up. A dialogue in shades of grey can steer away from stark black and white positions, or yes and no. There will be winners and there will be losers, but even in the worst case, everyone wins something. Building such a dialogue and such a vision for the state is the first step, and without that you can do nothing.

Is climate change on the radar for the state? What is the general consensus among the people?

Everyone talks about it, but there are no resources, and it’s not a priority. It is discussed, and of course, there will always be that one group that doesn’t believe in the effects of climate change. We are definitely living it, however. When I was a kid, November was for sweaters and scarfs, but look at the temperatures now. Summer generally used to end around October 20, but now we have rain into November. The high and low temperatures have changed for both cold and hot weather. There are many arguments about causes, and the recent catastrophe in Cambray has revived them.

What would be a healthy percentage for tax collection?

Assuming that resources are invested effectively, with the amount of poverty in the country and the investment requirements that exist, it’s difficult to pinpoint a formula, but I would say that with anything under 15 to 18 percent, we will never escape our current situation. And that’s just to start. When a sense of trust is reached that what is paid will be put to good use, it will be easier to increase that percentage. On the other hand, if there is economic growth, that will result in a larger base of contributors. But for an irreversible momentum for change, anything under 15 percent will not support necessary state interventions. The challenge is that with this rate, only an honest government can start to make changes. Again, this is assuming that 100 percent of the resources from the budget are invested honestly and efficiently.

How is the World Bank forecasting relatively stable or high growth for the region?

Guatemala is like someone who controls his blood pressure: you measure growth at any moment, and it’s around 3.5 percent. There has been macroeconomic stability for the last 10 to 15 years, but nothing else happens. We are not heading for a terrible catastrophe, in other words. No one foresees a break in the equilibrium. But we haven’t taken the next step to propel growth either. Our heart rate will not go up unless we exercise, and to exercise we need to invest, leave our comfort zone, and probably go into debt. In general, debt per se is not bad. For example, if I go into debt because I anticipate the benefits of something that I would never be able to do unless I save for 20 years, why wouldn’t I do it? I’m still going to pay it off in 20 years, but I can start to reap the benefits in two years.

Is the current debt ratio healthy for the country?

In relation to Guatemala’s GDP, it’s a manageable 23 to 24 percent. The problem is the percentage of the national budget that is dedicated to debt service. That’s why the tax burden is insufficient. The other issue is how the debt was negotiated. Sometimes expensive debt is negotiated, or short-term debt, and you’re left without any other options because deficits occur in a time-sensitive manner that doesn’t allow for an 18-month negotiation process.

For example, I might need money for one month because I don’t have enough for employee salaries. It’s like using a credit card with a high APR. So the debt ratio compared with the debt service is something that needs to be on the radar of future authorities so that they can adapt a debt-restructuring strategy. I don’t mean renegotiate, but they need to replace bad debt with good debt, and be very careful with any new debt so that it does not excessively burden the budget.

What is your perspective on the relationship between groups that are working in development, both the large international organizations and the small NGOs?

My view is that the absence of a strong government explains Guatemala’s problem. If a government or a governmental mechanism is incapable of coordinating its actions with those of civil society, what results is fragmentation and duplicity. To explain, it is useless for all of the foreign organizations and donors to sit at a table and talk about what they are doing if there is no governmental intervention to put order into the areas of action. So what you find is that in a community, there are churches from different denominations working on a health issue or an education issue. In some cases, you do see extremism, where their work is only for the followers of their religion. In other cases, you see a much more open and democratic process, but at the end of the day, there are fixed costs that become extremely expensive because everyone needs a platform to give the service, plus the variable costs. If these were distributed regionally in a well-organized way, or complementary to governmental intervention, the impact would be much better.

When there are holes, these holes are filled; filling them without coordination from higher up probably allows for scams with high costs that can’t be quantified because there is no one there to add it all up. We all know that duplication occurs. What the churches do is good and natural, but it could have a better impact if there were government coordination.

So the large international organizations don’t coordinate with the

The K'atún is very new. They are just now making it official, but the challenge is to make a plan a budget, and honestly, we are far from that point. When Guatemala adapts that plan, it needs to be clear that this is our path, and whoever is in charge of the government will have to implement it. But they have already made the decision to implement it. So there will have to be decisions on what to do first, second, etc. But until the government adopts it, the K'atún is just a list of things that could be done, that are still in the final stages of planning. We need to look at viability, define the order, define our priorities, allocate funding sources, and look for popular support. If the planning is not associated with resource allocation, it simply becomes a nonsensical academic exercise. That is the challenge that we need to overcome.

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