Can you imagine having to drive for 12 hours just to make a phone call? Or being on a 20-year waitlist to be able to buy a landline? That was the reality of telecommunications in Guatemala at the beginning of the 1990s. There were only 23 public phones per 100,000 inhabitants. These numbers were more than poor service; they represented a barrier to economic growth and everyday life.
Telecommunications are a crucial sector for a country’s development. An effective system attracts external investors by ensuring reliable communication across the territory, helping to develop the most isolated areas. But the state-owned Guatemalan Telecommunications Company (GUATEL), which was in charge of phone lines, was not keeping up with expectations.
Telecommunications originally arrived in Guatemala in 1881 through US companies, but the system was nationalized in 1921, after the original concessions granted to those companies were not renewed. Since GUATEL operated under government control, it was vulnerable to the political instability caused by the Guatemalan Civil War (1960–1996).
Frequent changes in government, combined with partial military control of the company due to security reasons, meant that changes in management were constant, with a new manager every six or eight months. Managerial decisions didn’t reflect the needs of the market; instead, they followed the priorities of whichever government was in power.
Meanwhile, demand for telephone lines kept growing, but GUATEL lacked the resources and efficiency to meet it. In 1994, only 2 out of 100 people had access to a phone, and 80% of lines were concentrated in the capital, leaving the rest of the country disconnected. Faced with this failure, and with the increasing demand for access, the decision was made to privatize GUATEL.
But why privatize? The answer lies in the proven benefits of a free-market system.
For starters, a free market fosters competition, which drives companies to be constantly innovating to attract new customers. In a monopoly such as GUATEL, there is no incentive to innovate, which resulted in an obsolete and inefficient telecom system. Why improve service when people were forced to buy from them at astronomical prices anyway?
Private property also generates incentives for efficiency. A state-owned company is tied to political interests and faces no consequences for poor decisions. It is entirely insulated from the effects of the market. In contrast, a private company faces monetary losses when it makes mistakes, which forces it to act responsibly and adapt to consumer needs. In state-run firms, these losses are simply paid by taxpayers.
Because they are subject to political interests and cycles, public enterprises suffer from a short-term view, blinding them to potential growth opportunities. Politicians are inclined to look for immediate results to secure elections, overlooking opportunities that might be better in the long run.
On top of all that, an investment of $1.147 billion was necessary to install 900,000 phone lines, the bare minimum required, an amount the Guatemalan state could not afford. Installation costs fell significantly after privatization, demonstrating that private investment was essential. A market economy generates new wealth through trade and innovation, while the State only redistributes what already exists.
This change was essential for Guatemalan society; privatizing GUATEL could greatly accelerate economic development. Studies have shown that a mere 10% improvement in phones could lead to a 0.5% growth in GDP. When people have better access to communication, businesses become more efficient, information flows faster, and their quality of life improves.
Some groups vehemently opposed this privatization. Union leaders claimed that this sale would benefit only the elite, harming the workers in the process. They argued that the private sector cares only about profits, not people, so they would see no reason to improve service for the general population.
However, what actually happened after the sale disproves these concerns. Before privatization in 1998, there were only 400,000 phone lines, but by 2009, there were 1.3 million, a 225% increase. The newly formed private Telecomunicaciones de Guatemala (TELGUA) achieved in a few years what the state-owned company had failed to do in decades. The benefits reached everyone, not just the elite.
Today, Guatemala’s telecom market is a duopoly dominated by Tigo and Claro, two major brands operating across Latin America. But this reflects regulatory constraints, not market failure. For example, the 5G spectrum is currently held by these two companies exclusively, but only because there is a Telecommunications Superintendence (SIT) restricting new entrants. The industry could improve further if entry barriers were lowered.
Similar examples can be found across the region. In Brazil, before the 1990s privatizations, phone lines were scarce, and each one cost more than $940. Today, there are more than 276 million lines, each costing less than $2 on average.
The powerful effects of the free market aren’t limited to telecoms. In the ’80s, Chile privatized its electric company. Access to electricity went up from 66% of households to 96%, with prices dropping around 20%.
Guatemala’s case offers a clear lesson: when markets are freed, innovation and competition can create massive benefits for all. GUATEL, as a state-owned company, was a disaster, characterized by low coverage, high prices, and poor service. Traveling 12 hours just to make a call may sound absurd today, but that was the reality only a few decades ago. It was a systematic inefficiency that lasted generations.
Once privatized, service became substantially better in just a few years. If the telecom industry was able to undergo such a radical, positive transformation, imagine what could happen if we freed other industries still trapped under state control.
The post Capitalism Connected Guatemala was first published by the Foundation for Economic Education, and is republished here with permission. Please support their efforts.
