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The Guatemalan economy must integrate into regional value chains

by | Sep 30, 2023

Guest Blog Post: Wendy Mena, Investment Promotion Advisor, Invest Guatemala

Small and medium-sized companies must enter the formal sector of the Guatemalan economy. By integrating themselves into Central American value chains, Guatemala and the region will become more attractive to international investors.

The Guatemalan economy benefits from regional trade

Guatemala, as one of the leading trading partners of Central American countries, has an excellent opportunity to integrate into regional value chains. Currently, Guatemala is an essential supplier to the countries of the region of inputs such as packaging, containers, agricultural and agro-industrial products, and textile materials that complement their production processes. This makes Guatemala a key partner in terms of regional value chains. The formalization and internationalization of small and medium-sized businesses and the attraction of investments in the Guatemalan economy will strengthen this complementarity and make the entire region more resilient and attractive to investors. Central American countries should focus on something other than competing among themselves but on strengthening the areas where their economies complement each other.

An event called ExpoParks was recently held in Costa Rica. This was the first gathering in the region dedicated to publicizing the offer of industrial parks and free zones in Central America and the Dominican Republic to companies looking for options to move their operations to countries closer to North American consumers. That is, it offered options to implement the nearshoring strategy. This is a strategy that is attracting historic investment flows to Latin America. It is a crucial opportunity for the Guatemalan economy and the rest of Central America.

Guatemala can benefit from its proximity to Mexico

To attract foreign direct investment, it is necessary to concentrate on different areas. On the one hand, Guatemala must formulate and implement policies to promote and modernize the supply of industrial parks. This is the case for the Guatemalan economy because the rest of the region has an advantage in industrial areas, ready for new companies to start operations and specialize in industries with greater added value. Second, because it is the closest neighbor to Mexico, Guatemala can take advantage of the opportunities that the former country can no longer absorb. On the other hand, in order to further fortify the Guatemalan economy, it is vital to strengthen the network of local suppliers to complement the value chains.

Given the significant nearshoring investment flows that its neighbor to the North generates, Guatemala’s proximity to Mexico opens the doors to opportunities. Guatemala can integrate itself into low and medium-complexity manufacturing value chains to supply clusters such as automotive, agri-food, medical devices, pharmaceuticals, and other light manufacturing activities. It can also become the logistics hub for North America for these industries thanks to Guatemala’s competitive distribution costs.

Along with the rest of Central America, the Guatemalan economy shares competitive advantages for nearshoring, such as strategic location, cultural affinity with North America, competitive operating costs, and a substantial network of free trade agreements. The industries’ specialization differentiates Guatemala, the workforce’s qualities, and the regulations for business start-ups. Like Costa Rica, Guatemala stands out for the size of its domestic market, political and economic stability, the redundancy of renewable electrical energy, and a well-organized business sector. However, those who view Central America from abroad see a region with a common foreign trade framework and economic institutions that unite its countries. A regional approach to development is vital since, in terms of population size and total production, the countries of the isthmus are very small when they act individually.

Central America has experienced strong economic growth in recent years

According to data from the World Bank, presented by one of the leading companies in corporate real estate services, Central America and the Dominican Republic represent 0.8% of the world’s population (61 million inhabitants) and 0.4 of the world’s Gross Domestic Product (GDP) in 2022. Central America is a collection of small economies. However, the region stands out for reporting the highest economic growth figures in two recent years, with 11.1% in 2021 and 4.9% in 2022. It also stands out for having a solid export structure, in which exports of goods and services represent 34.1% of GDP and by attracting foreign investment flows that have averaged 4.3% with respect to GDP.

This shows that, as a region, Central America offers more than a strategic location for nearshoring. As purely exporting countries, the region has the potential to integrate into global value chains with higher value-added products to the extent that it can also take advantage of the complementarity of the region’s economies. This will enable Central American countries to work together to face challenges that limit more investment from reaching the region, such as the availability of qualified labor, development of adequate productive infrastructure, modern investment attraction regimes, and promoting the digitalization and simplification of procedures that multinationals must comply with to start operations.

This is why, to take advantage of the nearshoring strategy better, Guatemala must focus on developing a network of suppliers to integrate into the region’s value chains that help create an ecosystem to form new economic clusters in the country. Micro, small, and medium-sized companies in the Guatemalan economy have an excellent opportunity to be part of this network of suppliers and thus grow their businesses or start new ones. This will also allow exports to grow, attract investment to more sophisticated sectors, and generate the more than 2.5 million good-quality jobs that the country needs

This post is a translated and edited version of an opinion piece that was originally published at PrensaLibre.com

 

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