BizCLIR

Along with the specific findings in 13 subject-matter areas, certain crosscutting themes emerged with respect to commercial legal and institutional reform (CLIR) and trade in Guatemala. It is important to consider and incorporate these themes but not necessarily through stand-alone initiatives. Rather, it would be prudent to address them within the context of any reforms undertaken, as detailed below.

A. CORRUPTION AND ECONOMIC DEVELOPMENT

Corruption—the misuse of public office for private gain—encompasses abuses by government officials, such as embezzlement and nepotism, as well as abuses linking public and private actors, including bribery, extortion, influence peddling, and fraud. Corruption arises in both political and bureaucratic offices and can be petty or grand, organized or unorganized. In the private sector, corruption increases the cost of business through the price of the bribes, the management cost of negotiating with officials, the risk of breached agreements or detection, and the efficiency losses from the market distortion. Ultimately, the costs of corruption can be either internalized by the private sector or passed along to the consumer.

In its 2004 Corruption Perception Index, Transparency International listed Guatemala in a tie at 122nd of 146 countries evaluated, with a score of 2.2 of 10, signaling a state of “rampant corruption.” The 2004 Corruption Perception Index is a distillation of 18 surveys conducted by 12 independent institutions, reflecting the perceptions of business people and country analysts, both resident and nonresident. The perceived level of corruption in Guatemala is currently the worst of the Central American Free Trade Agreement (CAFTA) countries. In Latin America, only Paraguay received a lower score.

Corruption in Guatemala is of such profound historical depth and current political import that a full discussion of its foundations, implications, and current machinations lies well beyond the scope of this report. Nevertheless, certain aspects of corruption can be isolated and addressed for the purpose of CLIR and trade development. In this report, the following observations can be found:
• Decades of authoritarian rule have left Guatemala with an inefficient, slow, and corrupt judicial system and have also resulted in pessimism and public mistrust in public institutions, justice, and security. It is widely asserted that judicial and administrative proceedings work for and are accessible to only a very few.
• Throughout Guatemala, a number of scandals from the previous administration involved the theft of government funds, nepotism, and general mismanagement. Complete investigations and convictions have often proven difficult because of pressure applied to investigators and judicial officials by very high-level government personnel.
• Corruption has been present in all levels of, and all participants in, the formal dispute-resolution process, including notaries, lawyers, court clerks, and judges (particularly criminal judges). Significant delays in justice occur, it is claimed, because many lawyers and judges receive bribes.
• Judges are suspected in particular of providing information to narcotic traffickers and of accepting bribes to dismiss cases or curtail sentences.
• Corruption of court personnel is considered a problem, particularly in rural areas.
• Corruption in the form of “slow money” is commonly mentioned as an ongoing issue in the Commercial Registry.
• Port-based counter-narcotics operations have been impeded by corruption at all three major ports.
• International visitors who seek work permits for extended stays routinely experience difficulties and report that Immigration Agency procedures are burdensome, nontransparent, and suffer from petty corruption.
• With respect to flows of people, as well as to goods and money, the most pressing issue is that of security. The primary supporting institution in this area, the National Civil Police (Policía Nacional Civil [PNC]), is not viewed as a strong institution for mitigating this problem. The police force is grossly understaffed and ill-equipped, and has a reputation for corruption.

Against this backdrop, one anticorruption initiative in Guatemala’s commercial and trade sectors stands out as noteworthy for the positive impressions it has generated. Namely, since 2002, the Customs agency has made tangible efforts to reduce both the documented instances and public perceptions of corruption. Customs officers who work with the public now display identification badges and wear a Customs agency shirt indicating that they are government personnel. Other initiatives have included removal of rent-seeking officers, certain financial disclosure requirements, increased appeals to professionalism, and increased automation. In addition, a new training program is being designed to incorporate integrity components. A great deal of work remains to be done, but improvements that are visible to the public (thereby engendering greater trust) or facilitative of greater transparency (thus reducing opportunities to obscure impropriety) show significant promise with respect to other institutions in Guatemala.

Namely, all the institutions engaged in some way in CLIR or trade could benefit from similar initiatives that strive to counter the motives and opportunities for corruption. The courts, registries, trade-related executive agencies (such as the Ministry of Economy and Immigration), and other institutions would benefit from multifaceted donor-sponsored programs that do the following:
• Work with relevant leadership to study the relationship between the institution at issue and the motives and opportunities for corruption, developing a detailed management plan for addressing the corruption
• Annually survey and report to the public about the costs of corruption, in an effort to promote a sense among consumers of public services that they should avoid participating in the market for corruption
• Embark on a meaningful and effective program to protect the security of higher-level decision-makers, including judges, who may succumb to corrupt practices ultimately because of fear for their personal security
• Establish, particularly among professional groups, codes of conduct that are created through a deliberative and consultative process, and ensure that these codes are shared with consumers of the public services
• Develop a system of financial disclosure, which includes public disclosure, for executive officials and judges
• Increase the perceived formality of certain administrative positions and processes, through means such as identification badges, uniforms, and prominently posted information concerning fees, schedules, and dispute-resolution mechanisms
• Employ automated systems in a way that encourages accountability and reduces opportunities for corruption (considering whether and to what extent the automation of a process may create new corruption opportunities for certain parties, such as information technology [IT] professionals)
• Increase the quality of and the opportunities for training in various CLIR and trade-related jobs.

Anticorruption initiatives can incorporate approaches such as short- and long-term technical assistance, resident advisors and mentoring, training curriculum development and execution, and public information programs. In the absence of continued reforms in the area of corruption, Guatemala’s ambitions for economic development will be greatly frustrated.

B. OBSTACLES INHIBITING THE ESTABLISHMENT AND GROWTH OF COMPANIES

As discussed throughout this report, businesses in Guatemala—in particular micro-enterprises and SMEs—face numerous obstacles within the legal, bureaucratic, and competitive environment that inhibit their abilities to become formally established under the law and to grow and expand. More than 50 percent of businesses in Guatemala operate in the informal sector —compared with, as a benchmark, fewer than 17 percent in Organization for Economic Cooperation and Development (OECD) countries— revealing the difficulties enterprises face. An entrepreneur seeking to establish a company in Guatemala confronts procedural inefficiencies and corruption when trying to register; restrictions in using collateral to secure debt; and threats to the very property on which the new company may operate, both from squatters on the land and from the performance of the Property Registry. Companies seeking to enforce their contracts face obstacles from notaries who have superfluous but mandatory involvement in the process and by judges who engage in formalism over substance. Moreover, companies that wish to expand their opportunities through international trade often face extreme inefficiencies within the agencies that are charged with regulating and facilitating their transactions, along with constant threats to the security of their goods.

Throughout this report, obstacles are identified and recommendations for change are suggested. The theme that emerges from these individual points is that relatively small changes may result in significant improvements to the business environment. The costs and challenges of implementing all the recommended changes vary, but each should be considered in the context of the overall environment for enterprise growth. As summarized recently in The Economist,
"Laggards sometimes argue that reforms would be difficult and costly to enact. But what could be simpler than scrapping a stupid rule? Simplifying procedures is harder, but not too hard. There are plenty of examples to learn from, and the World Bank estimates that the benefits of the reforms it advocates are 25 times the costs."

A nationwide effort to remove damaging constraints on business start-up and operation would encourage more new businesses to formalize their operations, thereby increasing opportunities to do business and improving access to capital. Formal incorporation in turn improves the environment for sound systems of corporate governance, leading to a higher degree of investor confidence.

C. CORPORATE GOVERNANCE

Improving the environment for domestic and foreign investment in Guatemala will take commitment at all levels to the foundations of a welcoming investment environment, including the rule of law, efficient judicial and regulatory systems, reduced corruption, and a commitment to competitiveness. Good corporate governance is a critically important part of this.

Corporate governance is the system by which companies are directed and controlled. Good corporate governance requires both a company law and a business environment in which persons who control a company—including directors, managers, and controlling owners—are fully committed and accountable to investors in the company. It requires a system in which there is adequate disclosure of financial and other information so that investors can have a meaningful voice in choosing directors and effective ability to choose and protect their investments. It also requires a court and judicial system in which investors can enforce their rights if necessary by litigation against a company or against persons who control it who abuse their positions of trust.

Guatemala currently has relatively strong systems in place relating to certain aspects of corporate governance, including internal and external company control, management transparency, and protection of minority shareholders. Guatemala’s company law generally requires businesses to delineate the rights and responsibilities of its different participants in their founding documents—including its board(s), managers, shareholders, and other stakeholders—and to spell out the rules and procedures for making decisions on company affairs.
As more complex corporate matters arise, a more sophisticated understanding and implementation of corporate governance will be needed. Lawyers in Guatemala will need training in how to counsel their clients in matters of corporate governance. Further, donor-sponsored business assistance programs, including those that assist micro-enterprises, SMEs, state-owned enterprises, and publicly owned enterprises, should include practical components in corporate governance, including the purpose of and protections afforded by corporate structures that provide for limited liability; the importance of enlisting legal counsel to assist with business formation; contracts and other transactions; disclosure requirements; enforcement of debts and, if necessary, dissolution; and additional principles and practices of corporate governance, such as director duties and shareholder rights.

D. PROFESSIONAL DEVELOPMENT

Throughout this report, weaknesses in institutions are observed to be significantly grounded in inadequate professional capabilities. For example—
• The officers of the Commercial Registry are poorly trained.
• The administration of the Property Registry is slow.
• With respect to the Collateral Registry, the perception is not that corruption is at the heart of its ineffectiveness; rather, inefficiency and lack of training are seen as more significant problems.
• In the courts, judges tend to overemphasize formal, process-oriented decision-making, instead of basing their decisions on the substance of the commercial laws they are asked to interpret. They typically do not search for the reality of corporate matters, it is said, but rather seek for compliance to the formalities.
• A lack of standardized and specialized training creates a lack of uniformity in customs procedures administration. This means traders are faced with procedures that lack transparency, predictability, and simplicity. These conditions slow down movement of goods and hamper the trading environment.

These and other oft-cited weaknesses in the performance of public servants warrant crosscutting consideration. Even in the context of low salaries, poor physical facilities, and other negative circumstances, the opportunity to learn more and do better likely will find an audience in the various CLIR and trade-related institutions this report surveys. There are various means that reform programs can use to confront and address poor command of subject matter, poor management and problem-solving techniques, and lack of institutional consistency.
Namely, professionals from all dimensions of the CLIR and trade communities could be encouraged to see their work as not simply a series of procedures to follow but as an opportunity to solve problems, serve the public, and make a difference. Through improved access to and quality of continuing education, strengthened professional organizations, and increased public understanding of what they are entitled to expect, Guatemalans in public service can be encouraged to do better. Similarly, in the private sector, successful business leaders should be challenged to set an example for improved systems of corporate governance through better accounting practices, more efforts at transparency, and stronger protections of minority shareholders. Incentive structures for improved performance should be considered and implemented.