Sunday, November 13, 2011

Financing Guatemala's War on Crime

AP: Ex-general Wins Guatemalan Presidential Election
Cornell: Legal Information Institute, U.S. Code
Diario de Centro América: Pérez impulsará reforma fiscal y luchará contra evasión
Estrategia & Negocios: Otto tendrá el desafío de ordenar las finanzas
The Guardian: Retired General Otto Perez Wins Guatemala Presidential Election
WSJ: New Guatemala Leader Faces Tests

Guatemala’s new president, Otto Pérez Molina, ran his presidential campaign promising voters that he would crack down on the increasing violence in the country. Guatemala’s murder rate is among the highest in the world (about eight times higher than the United States). Mexican and local drug cartels are carrying out kidnappings and extortions and taking over Guatemalan territory, using it as a smuggling route to the rest of the Americas. Analysts attribute President Pérez Molina’s win to Guatemalans’ desire to make the violence stop, but wonder if he will be able to deliver on his promise.

Although Guatemala’s economy is the largest in Central America, President Pérez Molina’s plans to combat crime will require funds in excess of what Guatemala currently has available. For example, the President wants to hire 10,000 new police officers and 2,500 more soldiers, but it is unclear where the President will find money to pay them. The President would like to raise the income tax to 14%, but previous efforts to increase the income tax have met resistance from Guatemala’s upper classes. Last year, Guatemala’s income tax rate was 10.3% (compared to between 15% to 39.6% in the United States), and economists believe that it will be very difficult for the government to equip the police force, military, and other sectors to fight crime when taxes are so low.

The tax increase is only part of the new President’s call for fiscal reform aimed at scaling back the country’s debt and providing funds for fighting crime. In addition to limited resources (its available budget is barely 10% of GDP due to the low taxes), Guatemala has a fiscal deficit of 3% of GDP and a debt of almost 25% of GDP. The President hopes to gain control over Guatemala’s debt to decrease dependence on international lenders. Experts cite mismanagement by the previous administration as a reason for the large amount of debt—for example, some programs were created without available funding, so the government had to take on more debt to pay for them. Even if Guatemala is able to reduce its debt, the government needs to address other issues that may affect its ability to pay for the fight against crime, such as roads in need of repairs, an impoverished population in need of services, and decreasing agricultural production in need of stimulus.

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