Public Expenditures
Both households and the government have failed to invest enough in education, health, and nutrition. About three-quarters of Guatemala's population are poor and, given their low incomes, the poor tend to underinvest in the human capital of their children. At the government level, whenever a financing crisis has occurred, as happened in the early 1980s and again in 1989-90, social sector expenditures have usually been the first targets for cuts. As a result, the level of social sector investments fell sharply from 1980 to 1992. By 1992, the cumulative effect of these cuts was to push real health expenditure down to 80 percent below its 1980 level, while real education expenditure was down to some 33 percent below its 1980 level. Infrastructure investment also declined considerably, which has constrained the viability and productivity of producers and, thus, has indirectly affected labor demand. There is a particularly desperate need for investment in rural roads.
Years of underinvestment have been aggravated by low internal efficiency and an inequitable and inefficient allocation of expenditures biased towards urban areas and the nonpoor. For example, the 1986 Constitution earmarks 5 percent of all tax revenue to San Carlos University, and in 1990, the operating expenses of the two largest hospitals in the metropolitan area exceeded the operating costs of all of the country's health posts and clinics.
It is important to identify the key source of Guatemala's low social expenditures. In fact, as a percentage of total government spending, Guatemala's health and education expenditures are similar to those of other Latin American countries because it raises much lower taxes as a percentage of GDP than do its neighbors. This should be borne in mind in devising a poverty reduction strategy.