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dairy products also must have import licenses. Authorities also have not enforced the Spanish labeling requirement.

Restrictions on foreign banks entering El Salvador have been removed. Foreign banks now face the same requirements as Salvadoran banks and can offer a full range of services.

El Salvador officially promotes foreign investment in most sectors of the economy. The foreign investment law allows unlimited remittance of net profits for most types of companies, and up to 50 percent for commercial

or service companies. Both elec. tricity generation and distribution and telecommunications remain in the hands of government monopolies. The government is privatizing some services in these indus. tries, improving the prospects of U.S. exports in these sectors. One U.S. power company has already invested in a local generating station. It is possible that the gov. ernment will choose to accelerate this trend.

El Salvador is a member of the GATT and expects to become a member of the World Trade Organization. The government is drafted legislation to implement the full range of its Uruguay Round commitments. 6. Export Subsidies Policies

El Salvador does not employ direct export subsidies. It does offer a six percent rebate to exporters of non- traditional goods based on the FOB value of the export, but exporters have found it very difficult to collect. In addition, exporters benefit from an exemption from the tax on net worth. Free zone operations are not eligible for the rebate but enjoy a 10-year exemption from income tax as well as duty-free import privileges.

In October 1994, the Salvadoran Central Bank announced that it would write of $5.7 million in credits granted to some 10,000 small businesses that sustained losses during the armed conflict. El Salvador is a not member of the GATT subsidies code. 7. Protection of U.S. Intellectual Property

El Salvador's new law protecting intellectual property rights took effect in October 1994. Implementing regulations have not yet been promulgated, but the law is being enforced. Local representatives of U.S. companies report a significant drop in violations, particularly in the areas of sound and video recordings. However the govern. ment has been hampered by resource limitations and a burgeoning crime rate that has forced it to give priority to crime-related issues. El Salvador remains on the Special 301 watch list pending U.S. government evaluation of the law's implementation.

The new law addresses several key areas of weakness. Patent terms are lengthened to 20 years (15 for pharmaceuticals), and the definition of patentability is broad. Compulsory licensing applies only in cases of national emergency. Computer software is also protected, as are trade secrets. Trademarks, however, are still regulated by the Central American Convention for the Protection of Industrial Property. It is an occasional practice to license a famous trademark and then seek to profit by selling it when the legitimate owner wants to do business in El Salvador. The government is working on consensual amendments to the convention to eliminate this problem.

El Salvador is a signatory to the Geneva phonograms and Rome copyright conven. tions. The government has signed the Berne convention on the protection of artistic and literary works. The National Assembly ratified the Paris Convention on the protection of industrial property in January 1994. 8. Worker Rights

a. The Right of Association.-Approximately 150 unions, public employee associations, and peasant organizations represent over 300,000 Salvadorans, about 20 percent of the total work force. Private sector workers can form unions and strike, while public sector workers can form employee associations, but may not strike. (Despite the restriction, there have been many strikes in the public sector.) Major reforms to the labor code were passed in April 1994, streamlining the process required to form a union; extending union rights to agricultural, independent, and smallbusiness workers; and extending the right to strike to union federations.

b. The Right to Organize and Bargain Collectively. Only private sector unions and unions at autonomous public agencies have the right to collective bargaining, though in practice government workers do so as well. The employment of union officials is protected by law until one year after the end of their term. This measure is generally respected, but some organizers have been dismissed before receiving union credentials. The labor code reforms attempt to address this problem.

c. Prohibition of Forced or Compulsory Labor.—The Constitution prohibits forced or compulsory labor except in the case of calamity and other instances specified by law. This prohibition is followed in practice.

d. Minimum Age of Employment in Children.—The Constitution prohibits the em. ployment of children under the age of 14. Exceptions may be made only where such employment is absolutely indispensable to the sustenance of the minor and his family, most often the case for children of peasant families, who traditionally work with their families during planting and harvesting seasons. Children also frequently work in small businesses as laborers or vendors, despite the legal requirement that they complete schooling through the ninth grade. Child labor is not found in the industrial sector.

e. Acceptable Conditions of Work.-In July the government raised the minimum wages

for commercial, industrial, service, and agro-industrial employees by 13 per. cent. The new rate for industrial and service workers was 35 colones per day (about $4); agro-industrial employees must be paid 26 colones (about $3), including a food allowance, per day. Despite these increases, approximately 40 percent of the popu; lation lives below the poverty level. The law limits the workday to eight hours and the work week to 44 hours, requiring premium pay for additional hours. Occupational safety remains a problem because of outdated regulations, limited enforcement resources, and a reluctance to strictly enforce regulations.

f. Rights in Sectors with U.S. Investment.-U.S. investment in El Salvador is distributed fairly evenly inside and outside the so-called "maquilas" or free zones. The labor laws apply equally to all sectors, including the free zones. However, in practice businesses in the free zones discourage union activity; those trying to form unions have been fired. The Ministry of Labor lacks the resources and support from the legal system to adequately monitor the activities of the companies in the free zones.

Extent of U.S. Investment in Selected Industries.-U.S. Direct

Investment Position Abroad on an Historical Cost Basis-1993

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Petroleum ......
Total Manufacturing

Food & Kindred Products
Chemicals and Allied Products
Metals, Primary & Fabricated
Machinery, except Electrical
Electric & Electronic Equipment
Transportation Equipment

Other Manufacturing
Wholesale Trade
Banking
Finance Insurance Real Estate
Services
Other Industries
TOTAL ALL INDUSTRIES

1 Suppressed to avoid disclosing data of individual companies.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.

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2 (1) 4 (1) (1) 104

GUATEMALA

Key Economic Indicators
(Millions of U.S. dollars unless otherwise noted]

1992

1993

1994

Income, Production and Employment:

Real GDP (1985 prices)
Real GDP Growth (pct.)
GDP (at current prices)
By Sector: (pct.)
Agriculture
Energy/Water

8,262

9,089 Key Economic Indicators-Continued

7,264

4.8 7,741

3.9 11,260

4.0 12,527

.O.O.O

25.3
2.7

24.9
2.9

24.8
2.9

(Millions of U.S. dollar unlens otherwise noted]

1992

1993

1994

4.5

..................................

Manufacturing

14.6 14.5

14.5 Construction

2.3
2.2

2.2 Rents ....

4.9
4.8

4.8 Financial Services

4.3

4.5 Other Services

6.0
5.9

5.8 Government Health Education

7.1
7.5

7.5 Transportation

8.4
8.4

8.5 Commerce

24.1 24.1 24.1 Mining

0.3
0.3

0.4 Real Per Capita GDP (1985 base)

745 824

881 Labor Force (000s)

2,803 2,897 3,213 Unemployment Rate (pct.)2

6.1
5.5

4.9 Money and Prices (annual percentage growth): Money Supply (M2) .......

2,234 2,451 2,584 M2 Annual Percentage Change

19.5
8.9

8.0 Base Interest Rates Commercial Banks (deposits)

16.0 14.0

15.0 Commercial Banks (loans)

25.0 27.0

25.0 Consumer Price Index .....

13.7 11.6

12.0 Exchange Rate (quetzal/dollar)

5.70 5.66 5.80 Balance of Payments and Trade: Total Exports (FOB)

1,284 1,356 1,383 Exports to U.S. ...

453
501

417 Total Imports (CIF)

2,328 2,381 2,566 Imports from U.S.

1,081 1,172 1,120 Aid From U.S.

70
55

54 External Public Debt

2,252 2,071 52,034 Debt Service Payments (paid)

720

556 N/A Net Gold and FOREX Reserves

473
608

608 Total Trade Balance

-1,044 - 1,025 - 1,183 Merchandise Balance with U.S.

-628 -671 -703 N/A–Not available. i 1994 figures are U.S. Embassy estimates Unemployment figures provided by the Guatemalan Government do not reflect serious underemployment, estimated as high as 50 percent.

Interest rates are average maximum levels
Based on Guatemalan customs dala.
As of June 30, 1994.
1. General Policy Framework

With a GDP of roughly 12.5 billion dollars, Guatemala is the largest economy in Central America, as well as the biggest importer of U.S. products. The 1993 mer. chandise trade deficit of 671 million dollars with the U.S. was more than double the figure recorded two years earlier.

Guatemala's economy is dominated by a strong private sector, with the government sector accounting for only about 12 percent of GDP. Agriculture accounts for a quarter of all output, two thirds of all exports, and over half of all employment. Half of all exports come from just five traditional agricultural products: coffee, sugar, bananas, cardamom, and meat. After several years of depressed world prices, export receipts from these traditional products have rebounded significantly in the last several years. Coffee export earnings, for example, are running 60 percent higher in 1994 than in 1993. The other main productive activities are commerce and manufacturing, which contribute 24 percent and 15 percent, respectively, of total GDP. Nontraditional exports such as drawback textile manufacturing and high value agricultural products now account for about 40 percent of export earnings, up from 17 percent six years ago. Tourism receipts accounted for $256 million in exchange earnings in 1993, but are running 10 percent below that level in 1994. The administration of Ramiro de Leon Carpio has adhered to the sound

fiscal and monetary policies that have been in place since 1991. As a result, real GDP growth for 1993 was about 3.9 percent, down somewhat from the 4.8 growth of 1992. Growth is expected to be about 4.0 percent in 1994. The Bank of Guatemala has adhered to a number of fairly, tight monetary measures and kept prices in check. Beginning in 1991, Guatemala implemented a policy of zero net credit to the Central Government, which halted the prior tendency to monetize the deficit. Since then, the Central Government deficit has been financed primarily by various bonds issued by the Finance Ministry. From a rate of 60 percent in 1990, inflation fell to an average of around 12 percent in subsequent years.

By drastically curtailing, expenditures in 1991, the government successfully reduced the consolidated public sector deficit from 4.7 percent of GDP in 1990 to just 1.6 percent in 1991. With the 1992 fiscal reform, the overall deficit fell further to just 0.6 percent. However, due to declining tax collections in real terms, the combined public sector deficit rose to 2.7 percent of GDP in 1993 and could reach as high as 3.3 percent in 1994.

Late in 1993, Guatemala began a shadow program with the International Monetary Fund, which the government hopes to convert to a formal standby agreement in 1995. In accordance with that agreement, the government has eliminated subsidies for municipal wages and, in March of 1994, liberalized gasoline prices. The government also concluded a Financial Sector Modernization Loan agreement with the Inter-American Development Bank. Under this program, Guatemala is moving to lil ralize and better supervise its financial system. The Government has yet to present legislation to implement the Uruguay Round to the Guatemalan Congress, although it has expressed its intent to do so. 2. Exchange Rate Policy

Guatemala maintains an open, relatively undistorted exchange regime. There are no legal constraints on the quantity of remittances or other capital flows. In early 1994, the government ended the requirement that local private banks sell all their foreign exchange to the Bank of Guatemala every day and eliminated the daily auction system for foreign exchange. Although the Bank still intervenes occasionally to dampen speculation, there are no longer any delays in acquiring foreign exchange. The government sets only one reference rate, which it applies only to its own transactions and which is based on the market determined commercial exchange rate. Re. mittances can take the form of dollar denominated government bonds, although the supply of these is limited. A number of banks also offer “pay through” dollar denominated accounts. Under this plan, the depositor makes deposits and withdrawals at a local bank, but the account is actually maintained in a U.S. bank on behalf of the depositor. The holding of dollar accounts in local banks is still prohibited.

The quetzal depreciated 10 percent in nominal terms during 1993. Thus, the quetzal more or less maintained its real value vis-a-vis the dollar last year, after having appreciated about 7 percent in real terms during each of the two prior years. So far in 1994, the nominal value of the quetzal, currently about 5.7 to the dollar, has not changed significantly. 3. Structural Policies

In mid-1992, the government instituted a sweeping tax reform. The income tax was simplified. Individuals now face a three tier income tax structure with a top rate of 25 percent; corporations pay a simple 25 percent flat rate. Most exemptions for value added taxes and most stamp taxes were eliminated. As a result of these reforms, the bases for both the income and value added taxes were broadened considerably. Tariffs on most imports from outside Central America were lowered first to a 5-30 percent band in 1992 and then to a 5–20 percent band in 1993. The main exceptions are on imports of rice, poultry and petroleum products, where tariffs ranging up to 45 percent remain in effect. In addition, the 3 percent surcharge on imports was eliminated in 1992. As a result of this reform, tax revenues increased from 7.4 percent of GDP in 1991 to 8.4 percent in 1992. Since then, however, tax revenues fell to 7.9 percent of GDP in 1993 and are expected to decline further to approximately 7 percent of GDP in 1994. The government's goal is to increase the tax burden to 8.5 percent in 1995, by increasing taxes and by increasing penalties for tax evasion.

Wheat, flour and sugar are virtually the only products on which Guatemala main. tains price controls. Direct government control of production is small and decreasing, with growing private participation in key areas such as electricity generation. Even in sectors controlled by the government (telecommunications, for example), foreign companies are generally allowed to compete for contracts on an equal basis with domestic producers.

Guatemala has also taken steps to streamline the regulatory process. For instance, all government processing of exports has been centralized in a "one stop shop." Virtually all export restrictions have been eliminated. The government is in the process of establishing a "one stop shop" for investors, as well. Nonetheless, the bureaucracy often presents a dilliculi hurdle for both domestic and foreign compa. nies, subjecting them to requirements that are both ambiguous and inconsistently applied. It is not unusual for regulations to contain few explicit criteria for the gov. ernment decision maker, thus generating significant uncertainty and latitude. Moreover, there is no consistent pattern or judicial review of administrative regulations. 4. Debt Management Policies

Guatemala's modest foreign debt has been declining for several years. The drop has been most marked in relation to GDP. From 35 percent of GDP in 1990, foreign debt fell to 22 percent by the end of 1992 and to i9 percent by the end of 1993. Public sector foreign debt has declined faster than total external debt, reflecting an increasing reliance on private, rather than public, investment. From 32 percent of GDP in 1990, the external debt of the public sector declined to just 18.3 percent at the end of 1993. During the same time period, debt serviæ increased steadily, reaching. 16.3 percent of exports in 1992, as Guatemala cleared its foreign arrears, before falling back to 14.4 percent in 1993. Following its first Paris Club agreement in 1993, the Government reached bilateral agreements to reschedule about a quarter of its approximately 450 million dollars in arrears on official bilateral debt. As of late October, 1994, however, Guatemala was still negotiating the rescheduling of its official arrears with Spain.

In December, 1992, Guatemala signed a 120 million dollar Economic Moderniza. tion Loan (EML) with the World Bank. Although Guatemala could have borrowed approximately 70 million dollars under the standby agreement with the International Monetary Fund (IMF), the government decided to treat the agreement as precautionary and never requested any disbursements. Guatemala received the first EML disbursement of 48 million dollars in December, 1992. The second tranche disbursement under the EML, scheduled for June 1993, finally occurred in the begin. ning of 1994 after the loan was restructured and the government entered into a new, "shadow agreement" with the IMF (following the successful, constitutional resolution of the auto-golpe of May, 1993 and the resultant economic dislocations). The third tranche, rescheduled for June, 1994 has yet to occur, since Guatemala had failed to meet several conditions for disbursement, particularly tax reforms and raising electricity rates. In early 1993, the World Bank provided another 20 million dol. lar loan for Guatemala's Social Investment Fund. Guatemala is close to meeting the conditions for disbursement of the second tranche of a 130 million dollar financial sector modernization loan from the Inter-American Development Bank. 5. Significant Barriers to U.S. Exports

Exporters to Guatemala enjoy a generally open trade regime. For the most part, imports are not subject to nontaris trade barriers, although arbitrary customs valuation and excessive bureaucracy can sometimes create delays and complications. The vast majority of tariffs has been reduced to a band of 5–20 percent.

Restrictions remain on foreign investment in very few sectors. The Constitution provides the state telephone company, Guatel, with a monopoly on most telecommunications services. The Constitution also designates all subsurface minerals, petroleum and other resources as property of the state. Concessions are typically granted in the form of production sharing contracts. However, the solicitation and contracting process for energy concessions tends to be protracted and nontransparent. Some foreign oil companies also complain that the Guatemalan royalty scale is not competitive with that of other countries. Also, only Guatemalan citizens or corporations which are at least 75 percent owned by Guatemalans can operate radio or television stations. Foreigners can own no more than 30 percent of "small mining" or forestry companies. Ground transportation is limited to companies with at least 60 percent Guatemalan ownership. Licensing requirements for fishing operations are enforced insuch a way as to ensure at least minority Guatemalan participation. Only airlines with at least 51 percent Guatemalan ownership can provide domestic service.

Foreign firms are barred from directly selling insurance or rendering licensed professional services, such as legal or accounting services, in Guatemala. Foreign firms are still able to operate, however, through correspondents or locally incorporated subsidiaries. Most "Big Six” U.S. accounting firms are represented in Guatemala. Restrictions on housing construction are so onerous that they virtually exclude foreign participation.

Sanitary licenses are required for all imports of animal origin. During the past year, the impact of this requirement on U.S. exporters has been negligible. However, recent reports indicate that Guatemala may begin using these license requirements

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