Leadership and Democracy LabWestern Social Science

Political Stability and Instability: A Glass Ceiling to Guatemala's Renewable Energy Sector?

Analysts: Isaac Crawford-Ritchie, Ryan McCabe

Team Leader Haliz Doskee

11/7/2016

Guatemala’s renewable energy sector has great potential to become its most productive industry. With tremendous capacity and commitments to develop their capabilities, as well as interest from foreign investors, it seems that renewable energy could be central to the economic development of a nation that has suffered for decades. However, this optimism regarding the future of Guatemala’s economic potential is repressed by the political instability that has plagued the country. Corruption scandals have created an environment that, if no change comes to the political situation, could prove to be too risky and may deter foreign investment into Guatemala’s renewable energy sector.

Guatemala is one of the most insecure countries in the world. They have experienced decades of violence resulting in a profound distrust of the police, ultimately causing a civil war in 1996. In the late ‘80s, a political transition to a democratic government began. Despite this, institutions such as the police force remain suspect, and the military shows little regard for human rights. Allegations of drug trafficking, corruption and inequitable distribution of resources has made political development in the country stagnant. The political instability reached an all-time high in 2015, when then President Otto Pérez Molina, was marred by a major corruption scandal where Molina and other notable officials created a money laundering structure that would be used to launder money from a Spanish construction company. These allegations lead to Molina’s resignation and eventual imprisonment.

After a highly contested presidential election, Jimmy Morales assumed office in early 2016. Morales, a political outsider and former comedian, drew unlikely popularity after running a campaign built on a slogan that he is neither corrupt, nor a criminal. Despite some optimism, a new corruption scandal surrounding President Morales’ Vice President and family members has tarnished his credibility. Though these allegations remain unproven, and Morales has stated that he would not interfere with the investigation, the allegations themselves reinforce the skeptical sentiment many Guatemalans feel towards their government.

The political instability in Guatemala affects the economy, and specifically the renewable energy sector, in various ways. Firstly, it hinders economic growth by affecting the human capital in the country. Political instability encourages people to look for employment opportunities outside the country. Additionally, instability could affect the millions of dollars pledged to Guatemala, El Salvador, and Honduras by the United States, as the US House of Representatives is ostensibly looking for a reason to change the terms of the. This potential change in plans could prolong the migration problem and hinder economic development, as the opportunities that the plan would ideally create would be negatively affected. More notably to the renewable energy sector, backtrack by the American government could signal to foreign investors that the political risk is not worth the potential benefits of attempting to develop the sector. According to Global Finance Magazine: “the entrenched nature of corruption no doubt impacts long-term economic growth potential.” So, despite the optimistic calculations of renewable energy potential economically, this potential for growth will be hurt by political instability. Additionally, according to an IMF Working Paper, an uncertain politico-economic environment raises risk and reduces investment in a given nation. The Multilateral Investment Guarantee Agency goes further as to say that political risk is the most important factor constraining foreign direct investment in developing countries. Without foreign investment – a crucial factor in the development of Guatemala’s economy – the renewable energy sector is severely disadvantaged and will have great difficulties developing to its potential.

There are mitigation strategies that could be utilized to repair the politically unstable stigma that has plagued Guatemala for decades, and consequently could make the country a more intriguing alternative to future investors. Primarily, the country would do well to focus on fixing the political gridlock. Currently, President Morales’ political party has a meager 11 seats in parliament out of a possible 158, with a total of 13 different parties being represented. As a result, passing legislation to combat the widespread poverty and crime has become an arduous task, greatly inhibiting the government’s ability to do its job effectively. This political stagnation combined with the frequent corruption scandals by elected officials has disenchanted the public from the government, and has perpetuated the sense of political instability in Guatemala. The only realistic solution, it would appear, to solving the gridlock would be to establish a coalition between the parties – one large enough to pass legislation. Passing legislation, implementing and enforcing policy would provide the Morales government with a much needed element of credibility as well as starting to legitimize the government in the eyes of the citizens and international foreign investors. Addressing the root causes of the pervasive poverty and inequality in the Guatemalan society through enacting tenable legislation would improve the government’s relationship with the citizenry, thereby increasing a sense of stability in the country, and with it, increasing the probability of foreign investment.

 Furthermore, the government should take into account the opinions and advice of the public in the effort to regain trust that has too often been betrayed. Organizations such as the National Democratic Institute specifically create programs with the sole intention of increasing the public confidence in the democratic institutions of their country. Government utilization of services such as these could be extremely useful for improving the image of the Guatemalan government in the eyes of both the citizens and foreign investors, and could help provide a catalyst for economic development in a country that has long been hampered by the effects of political instability.

Guatemala’s growth and development of its economic and social institutions has been diminished by widespread corruption and political instability. Although the renewable energy sector is poised for rapid growth, the political environment in Guatemala has rendered potential foreign investors apprehensive. A recent change in government has so far been unable to accomplish what it promised, and unless it can form a coalition that allows it to pass legislation, while simultaneously maintaining close contact to the citizenry, Guatemala’s renewable energy sector, along with its social and economic institutions, will remain underdeveloped.