THE DYNAMICS OF SECTORAL GROWTH IN THE CENTRAL AMERICAN

COUNTRIES: RECENT TRENDS AND PROSPECTS FOR 2020

 

 

 

[PARTIAL DRAFT, 30 JUNE 1999]

 

 

 

 

 

 

Clarence Zuvekas, Jr.

Consulting Economist

Annandale, Virginia

 

 

 

 

 

 

 

 

This paper is a contribution to the "Central America 2020" project undertaken by the Institute of Iberoamerican Studies (Hamburg, Germany), the Inter-American Dialogue, and the Latin American and Caribbean Center at Florida International University, and jointly sponsored by the U.S. Agency for International Development and the European Commission.  The views expressed in this draft version are those of the author alone.  Comments and suggestions are welcomed.

 

 

I.          INTRODUCTION

 

Even after two decades of import-substituting industrialization, the five countries of the Central American Common Market (CACM) remained in 1980 more agricultural than industrial.[1]  The same structure was evident in Belize,[2] while Panama differed from the rest of the region in that both agriculture and manufacturing were dwarfed by the services sectors.[3]

 

In the last two decades, the structure of production has changed significantly in some Central American countries but not in others.  The next section of this paper, which reviews these patterns, notes that the relative importance of any sector (and in particular agriculture) is sensitive to the base year in which the national accounts data are expressed in constant prices.  Especially where base years are several decades old, differences between constant-price and current-price shares can be large.

 

The third section of this paper discusses likely trends in the regional, hemispheric, and world economies during the first two decades of the 21st century, and their potential effects on the structure of production in Central America.  In the fourth section, the focus is on economy-wide and sectoral reforms needed for the Central American countries to strengthen their domestic and regional economies and to participate more effectively in the global economy.  A fifth section presents alternative visions of the structure of the Central American economies in 2020, with and without major additional policy reforms [and possibly using the two alternative scenarios for the world economy presented in OECD (1997)].  The final section provides policy recommendations for development assistance that would more effectively assist the countries of the region to achieve their aggregate and sectoral growth potential.

 

 

II.        CHANGES IN THE STRUCTURE OF PRODUCTION SINCE 1978

 

A.        Data Sources and Issues

 

This section reviews changes in the structure of production in each of the seven countries between 1978-80 and 1995-97; data are also provided for an intermediate period, 1987-89.  Sectoral shares of GDP are calculated on the basis of three-year averages to reduce distortions caused by sharp annual fluctuations in sectors such as agriculture and construction.  The initial period, for the most part, excludes the "debt-crisis" effects of the 1980s.  Earlier base years were chosen for El Salvador (1976-78) and Nicaragua [(19xx-xx)] to minimize the effects of those countries' civil wars.  The final period is 1995-97 rather than 1996-98 to avoid the distorting effects of Hurricane Mitch, which had unusually severe effects in some countries, particularly on agricultural production.

 

Sectoral shares of GDP are presented in the Appendix tables in both current and constant prices, although most of the discussion in the text is based on constant-price trends.  The quality of the national accounts data varies among countries.  Also, the base year is sometimes quite old (1958 in the extreme case of Guatemala), a situation that over time increasingly distorts reported trends in overall real GDP growth, as sectoral weights become increasingly outdated.  In Central America, the use of old base years tends principally to exaggerate the relative importance of agriculture.

 

It is important also to examine two "sectors" not identified as such in the national accounts, but which for Central America as a whole recently have shown considerable dynamism: maquila (assembly) operations (mainly for apparel) and tourism.  Data for these activities come principally from balance-of-payments statistics, although in some cases maquila operations are identified as a branch of manufacturing.  Both maquila operations and tourism have good prospects for continued rapid growth.

 

 

B.        Trends by Country

 

 

[Eventually I will make this section shorter, putting most of the material in an Annex]

 

1.         Belize.             [To be added.]

 

 

2.         Costa Rica.     [To be added.]

 

 

3.         El Salvador.  El Salvador updated its national income accounts in the early 1990s, changing the base year from 1962 to 1990.  One of the most significant effects of this change was to reduce sharply the relative weight of the agricultural sector in 1978, from [XX]% of GDP to 16.8%.  This and other changes have affected overall real GDP growth figures, sometimes significantly.[4]

 

The new national accounts figures show that agriculture accounted for 16.1% of real GDP in the 1976-78 period.  Agriculture's share rose to 17.2% in 1987-89, despite a 13.7% drop in real value added, because war-induced production declines were even greater in the rest of the economy.[5]  And while agriculture grew cumulatively by 14.3% between 1987-89 and 1995-97, the much stronger performance of the rest of the economy[6] lowered agriculture's share to 14.2%.[7]^{, [8]}  Per capita agricultural production in 1995-97 was 23.4% below its 1976-78 level.  A significant appreciation of the real effective exchange rate during the 1990s has offset the favorable effects since 1989 of initial currency depreciation, price and marketing liberalization, and the end of the civil war in January 1992.[9]

 

Within the agricultural sector, crop production strongly dominates, although its share of sectoral value added in constant prices fell from 72% in 1976-78 to 64% in 1987-89 and remained at that level in 1995-97.  Coffee accounted for 34%, 39%, and 35%, respectively, of value added in the crop sub-sector during the three periods under consideration.  Cotton, second in importance at 23% in 1976-78, fell sharply to 4% in 1987-89 and statistically disappeared in 1995-97.  The demise of cotton, evident also in the rest of Central America, reflects a combination of factors, including the civil war, depressed world market prices, and environmental problems.  Basic grains significantly increased their share of the crop sub-sector from 18% in 1976-78 to 29% in 1987-89 and 31% in 1995-97.  Real per capita value added in basic grains in 1995-97 was 19% higher than in 1976-78.

 

All other agricultural sub-sectors increased in relative importance between 1976-78 and 1995-97: livestock, from 14% to 16%; poultry, from 6% to 10%; forestry, from 5% to 6%; and fishing and hunting, from 3% to 4%.

 

Manufacturing's share of real GDP fell sharply from 27.0% in 1976-78 to 21.4% in 1987-89, then rose to 22.8% in 1995-97.  However, data since 1990 include value added in maquila operations.  If these are excluded, manufacturing's share of GDP in 1995-97 drops to 21.0%, and its annual real growth rate between 1987-89 and 1995-97 falls from 8.0% to 6.2%.  Despite this relatively strong recent performance, real manufacturing value added in 1995-97 (excluding maquila operations) was 13% below its 1976-78 level.

 

Within manufacturing, the share of food products rose from 15% of real value added in 1976-78 to 26% in 1987-89 and 29% in 1995-97.  The relative increase over the first period was due more to a sharp decline in other manufacturing activity than to food products' modest real annual growth of 1.2%.  In the second period, however, real value added in food products rose by 5.3% annually.

 

The combined share of the textile and apparel sub-sectors fell from 23% of real sectoral value added in 1976-78 to 16% in 1987-89 and 15% in 1995-97.  Wartime disruptions, and the resulting sharp drop in real per capita GDP, explain most of the relative decline in the first period.  Below-average growth in the second period may reflect in part the recent appreciation of the real effective exchange rate.  Other changes in real sector output between 1976-78 and 1995-97 include relative declines in basic chemicals (from 11% to 9%) and rubber and plastics (from 8% to 2%), and a relative increase in non-metallic minerals (from 3% to 5%).

 

Elsewhere in the economy, value added in mining increased in relative importance during both periods, but it still represents only 0.5% of GDP.  Construction's share of GDP fell slightly from 4.4% in 1976-78 to 4.0% in both later periods.  The utilities sector rose from 0.7% of GDP to 1.2%, then fell to 0.6%.  However, the reported decline of 24.4% in this sector's value added over the second period seems inconsistent with overall real GDP growth of 37.8%.[10]  Moreover, value added in this sector seems generally to be significantly underestimated.[11]

 

Among the services sectors, the sharp relative decline in commerce during the first period, from 19.6% to 15.3%, seems broadly consistent with the significant contraction of external trade and overall economic activity at the time; but if some commercial activity shifted to the unrecorded, informal economy, the extent of the decline would be exaggerated.  Commerce's rebound to 21.4% in 1995-97 seems consistent with strong economic growth

during the 1990s, the recovery of external trade, and the increased inflows of overseas remittances, which are heavily biased toward consumption.[12] In current prices, the commerce sector's share of GDP showed a notable increase, from 9.2% in 1976-78 to 14.2% in 1987-89 and 20.6% in 1995-97.

 

The other private services sectors unfortunately are not disaggregated prior to 1990 in the new national accounts statistics.  Their combined share of real GDP rose from 21.3% in 1976-78 to 25.7% in 1987-89, then fell to 22.4% in 1995-97.  For the 1990s, the disaggregated data show the following real annual growth rates between 1990-92 to 1995-97:

 

Banking, Real Estate & Other Financial Institutions        13.6%

Real Estate and Business Services                                 4.3%

Housing Rentals                                                            1.6%

Communal, Personal, Social & Domestic Services         4.1%

 

Of these sectors, only banking, insurance, and other financial institutions grew faster than the overall GDP growth rate of 4.4%.

 

The share of public administration in real GDP rose sharply from 4.0% in 1976-78 to 7.7% in 1987-89, reflecting expenditures on the war effort, nationalization of banking and marketing operations, and the sharp decline in private economic activity.  By 1995-97 the public-administration share was down to 6.1%.

 

Balance-of-payments data for maquila activity show that value added in 1984, the first available year, amounted to $6 million.  By 1990 the figure had reached $18 million, still a relatively small figure.  The expansion of maquila activity in the 1990s, however, has been dramatic, with value added reaching $291 million in 1997.  Factors contributing to this growth include the end of the civil war; the devaluation of 1989; sound macroeconomic policies; and declining real wages (Paus 1995), which have offset the recent real appreciation of the colón.

 

National accounts data, showing maquila operations as a branch of manufacturing since 1990, reveal that real value added from this activity grew steadily from 0.4% of GDP in 1990 to 2.2% in 1997.[13]

 

Tourism in El Salvador has been only a modest source of foreign-exchange earnings.  From the late 1970s to the early 1990s, the civil war discouraged travel to the country.  Foreign-exchange receipts from travel to El Salvador averaged $75 million in 1990-93 and $86 million in 1994-97.  Factors contributing to the slow growth of tourism, despite the end of the civil war and sound economic policies, include infrastructure shortages, weak public and private promotional and development activities, concerns about personal security, and an appreciating real exchange rate.

 

4.         Guatemala.

 

            [To be added.]

 

5.         Honduras.  Honduras's structure of production, measured in constant prices, has changed relatively little since the late 1970s.  This is particularly true of agriculture, whose share of GDP at factor cost has remained at about 27%, and manufacturing, which has held steady at 15%.  The share of mining fell from 2.0% in 1978-80 to 1.8% in 1995-97, while that of construction declined from 5.4% to 4.2%.  The relative importance of the utilities sector more than doubled, from 1.3% to 2.9%.  The GDP share of three services sectors increased, while that of three others declined:

 

                                                1978-80           1987-89           1995-97

 

Transportation                            6.7                   8.3                   8.6

Finance                                      5.8                   6.6                   9.7

Housing                                      5.5                   6.4                   6.6

 

Commerce                               15.2                  11.6                10.9

Public Administration                  6.9                   7.5                   4.8

Personal and Other Services       9.1                   9.0                   7.7

 

 

The reported sharp drop in the relative importance of commerce, most of which occurred between 1978-80 and 1987-89, is surprising.[14]  It may be due in part to the decline in external trade during the 1980s; but it may also reflect a shift in some commercial activities to the informal economy, where many activities are difficult to measure and therefore are unrecorded.

 

Since the base year for the national accounts data is 1978, significant differences between constant-price and current-price data in 1995-97 are not surprising.  As early as 1987-89, agriculture's current-price share (21.1%) was sharply below its constant-price share (26.8%), reflecting a drop from the relatively high prices of the late 1970s.  The respective figures in 1995-97 are 22.5% and 27.5%.  In manufacturing, by contrast, the current-price share of GDP in 1995-97 (18.0%) significantly exceeds the constant-price share (15.3%), a phenomenon that was not evident in 1987-89.  Other major differences in 1995-97 are in transport, storage, and communications, where the current-price share of GDP (4.6%) is far below the constant-price share (8.6%); and utilities and other services, whose respective current-price shares (5.7% and 10.0%) are well above their constant-price shares (2.9% and 7.7%).

 

Honduras's agricultural sector grew in real terms at annual rates of 2.5% between 1978-80 and 1987-89, and by 3.7% between 1987-89 and 1995-97.  In per capita terms, value added in agriculture declined in the first period by 0.5% a year, then rose in the second period at an annual rate of 0.8%.  In both periods, coffee grew faster than the rest of the sector:

 

Annual Growth Rates of Value Added (%)

Total Agri-                               Other Agri-

culture              Coffee              culture

 

1978-80 to 1987-89                 2.5                    3.6                    2.1

1987-89 to 1995-97                 3.7                    5.5                    2.9

 

The agricultural sector is dominated by crop production, whose relative share of sectoral value added held steady at 65% in constant prices, although varying considerably in current prices.[15]  The crop sub-sector was even more dependent on coffee in 1995-97 (48.3% of value added in crop production in 1978 prices) than in 1978-80 (38.1%).  Meanwhile, the constant-price share of bananas fell from 24.7% of crop production in 1978-80 to 11.3% in 1995-97, reflecting a considerable loss of the country's world-market share of banana exports in recent years.[16]  The relative share of livestock production has declined significantly over the last two decades, but poultry production has shown considerable dynamism.  Forestry has also lost considerable relative importance, especially since 1987-89, while the fisheries sub-sector has gained, mainly because of the expansion of shrimp farming.

 

The major factors limiting sectoral growth between 1978-80 and 1987-89 were the uncertainties created by the armed conflicts in neighboring countries and an increasingly overvalued exchange rate.  Agriculture's stronger performance since then is due largely to significant liberalization of agricultural prices and marketing and the 1990 devaluation of the lempira.  These positive factors have outweighed the negative effects of limited public investment in rural infrastructure and agricultural services, continuing land-tenure insecurity, and real exchange-rate appreciation in recent years.  Still, the sector is performing well below its potential.

 

Manufacturing grew at sluggish real annual rates of 2.6% between 1978-80 and 1987-89 and 3.4% between 1987-89 and 1995-97, closely paralleling the growth of aggregate GDP over these periods (2.5% and 3.3%, respectively).  The largest sub-sector—foodstuffs, beverages, and tobacco—grew at above-average rates (3.9% and 4.1%, respectively), increasing its share of sectoral value added from 36.3% in 1978-80 to 43.1% in 1994-96.[17]  Another major sub-sector, apparel, declined at an annual rate of 2.4% in the first period, then grew at a rapid annual rate of 14.9% during the second.  Its 12.2% share of sectoral value added in 1994-96 thus exceeded its 9.1% share in 1978-80.[18]  Four other sub-sectors saw their share of sectoral value added increase, and four experienced declines:

 

                                                                        1978-80           1994-96

 

Paper and Paper Products                                  4.1                   5.7

Non-metallic Mineral Products                            5.0                   7.9

Basic Industrial Metals                                        0.1                   0.7

Other Industries                                                  0.7                   1.0

 

Wood and Wood Products                               10.6                  3.7

Chemicals and Chemical Products                     11.6                  7.9

Metal Products, Machinery & Equipment            6.7                   6.3

Artisan Products                                               15.8                 11.5

 

 

The wood and wood products sub-sector experienced a 46% real decline in value added between 1978-80 and 1994-96, reflecting poor management of the country's extensive forestry resources by the parastatal company, COHDEFOR.

 

Turning now to the balance-of-payments statistics (Table [x]), the data on maquila exports are not consistent over the entire period between 1978 and 1997 because of incomplete coverage in earlier years.  Still, as late as 1990 value added by maquila firms appears to have been at most about $20 million, comparable to that of El Salvador and far behind that of Costa Rica and Guatemala.  Since 1990 it has risen explosively, to $305 million in 1997 and $398 million in 1998.[19]  Honduras has become the leading Central American supplier of maquila products to the U.S. market.  About 95% of these exports are apparel items, although non-apparel assembly operations recently have begun to show some dynamism.  Employment in the maquiladoras is now close to 100,000, or about 4.5% of the total labor force.

 

Factors contributing to the rapid expansion of maquila operations in Honduras include improved macroeconomic policies since 1990, favorable tax and other legislation, relatively low wages in dollar terms after the devaluation of 1990, and the favorable geographic location of the San Pedro Sula-Puerto Cortés area with respect to U.S. markets.

 

Figures for exports of tourism services, like those for maquila exports, are not consistent over time.  Data prior to 1993 are incomplete, excluding information from the Instituto Hondureño de Turismo that have been incorporated since that year.  The new data show very rapid growth in tourism receipts during the 1990s, from $60 million in 1993 to $164 million in 1998.  This expansion has been stimulated by the end of armed hostilities elsewhere in Central America; the 1990 devaluation; economic prosperity in the United States; generally sound economic policies; and expectations that new legislation friendly to foreign investment in tourism would be approved (which occurred in December 1998).

 

6.         Nicaragua.                  [To be added.]

 

7.         Panama.                      [To be added.]

 

 

III.       ANTICIPATED GLOBAL, HEMISPHERIC, AND REGIONAL ECONOMIC TRENDS AND THEIR POTENTIAL EFFECTS ON THE STRUCTURE OF PRODUCTION IN CENTRAL AMERICA

 

A.        Overview

 

As small, open economies, the countries of the Central American isthmus are highly sensitive to events beyond their borders.  Globally, they are affected by volatile prices for their major commodity exports and for one major commodity import, petroleum.[20]  Moreover, the decline in relative prices of primary products since 1980 is likely to continue well into the 21st century (OECD 1997:78; Reinhart and Wickham 1994).[21]  Within the Western Hemisphere, the Central American countries' high dependence on exports to the U.S. market makes them vulnerable to trends in that large economy.  Also, as intra-Central American trade has expanded significantly since plummeting between 1980 and 1986,[22] the countries of the region are increasingly affected by each other's economic performance.  Thus the heavy damage caused by Hurricane Mitch in Honduras and Nicaragua in October 1998 not only affected their own export capacities but also temporarily reduced the demand for imports from their neighbors.  Moreover, the effects of Hurricane Mitch on other Central American countries (although moderate in El Salvador and Guatemala and small in Costa Rica) have lowered somewhat the demand for Honduran and Nicaraguan products.

 

Despite this vulnerability to external events, the economic depression experienced by the Central American countries in the 1980s led to

 

[a]        remarkable consensus . . ., across most of the . . . political spectrum, on the desirability of export expansion and diversification into new products, based on comparative advantage and liberalized trade.  It reflected a recognition that the international economic environment had changed radically since 1980, and that several major sources of foreign exchange, available in the 1960s and 1970s to these import-dependent economies, would be less bountiful in the future (Zuvekas 1997:3).[23]

 

This section seeks to identify some of the major changes likely to occur in the global, hemispheric, and regional economic environments over the next two decades, and to consider how these trends might affect the structure of production in Central America.  The region has basically accepted the challenges of globalization; but not all countries are well prepared to meet these challenges.

 

 

B.        The Global Economy

 

One can conceive a rosy scenario for the first two decades of the 21st century, based on rapid technological progress (e.g. in telecommunications, biotechnology, environmentally-friendly energy, and transport) and on favorable economic policies in the OECD countries, China, East and South Asia, Latin America, and the transition economies of Europe and Asia.[24]  Even a few thorns among the roses (e.g. civil wars, localized cross-border conflicts, AIDS, and occasional financial crises) would not prevent a generally positive economic outcome.  The OECD's high-growth scenario (1997:92) envisions average annual world economic growth of 5.0% in the first decade of the new century and 4.9% in the second.

 

On the other hand, one could paint a rather grim picture of the next two decades in which the world is dominated by protectionism; other backsliding on economic policy; major regional and even global financial crises; the reignition of armed conflict in areas where peace has been achieved; and generalized social and political unrest that reflects such factors as increased income inequalities and decreased personal security, and that could reverse the present trend away from authoritarianism toward democracy.

 

An intermediate position is represented by the OECD's (1997:92) low-growth scenario, which envisions world GDP growing at an average annual rate of 3.1% in 2001-2010 and 2.8% during 2011-2020.

 

This paper leans toward a favorable outcome for the world economy, reflecting the author's optimistic long-run worldview, however much he might be concerned about short-term events.  Still, it is important to bear in mind what is presented below is a series of speculations, not projections.

 

1.         Trade

 

            [--        Prospects for WTO reforms, drawing on Croome (1998); Díaz-Bonilla and Robinson (1999); Lawrence, Rodrik, and Whalley (1996); Preeg (1998); Rodrik (199x); and other studies.]

 

            [--  Includes brief discussion of labor standards, environmental concerns, and competition policy as likely elements of trade agreements.]

 

2.         Financial Flows

 

            [--  See OECD (1997); IDB studies; others]

 

3.         Technological Progress

 

            [--  This section will draw on OECD (1998), among other studies]

 

            [--        telecommunications

            --          biotechnology

            --          energy

            --          transport]

 

4.         World Economic Growth and Patterns of Demand for Central America's Exports

 

            --          agricultural products

 

            [--  Based in part on IFPRI documents]

 

            --          manufactured goods

 

            [--  See OECD (1997); other studies]

 

            --          services

 

World trade in services grew by 8.7% annually between 1980 and 1995, nearly double the 4.5% annual growth rate for merchandise trade (OECD 1997:37).[25]

 

The OECD (1997:38) has estimated that, in terms of technical feasibility, some 12%-16% of service jobs in the G7 countries could be shifted abroad.  Assuming that it would be economically attractive for about 10% of such jobs to move overseas, "as of 1990 the potential additional exports from developing countries to the G7 was estimated at around $40 billion (or 6 per cent of non-OECD countries' total exports)."

 

Within Central America only Costa Rica [and perhaps Panama?] have begun to tap into this potential in any significant way.  For example, in June 1999 Proctor and Gamble announced that it would invest $60 million to build a Global Business Services center in Costa Rica, employing about 1,500 persons in services related to finance and accounting, customer orders, payroll, travel management, purchasing, and information technology.[26]

 

 

C.        Toward a Free Trade Area of the Americas

 

            [--  Brief discussion of prospects for the FTAA and implications for Central America]

 

 

D.        Strengthening Central American Economic Integration

 

            [--  Perhaps 1-2 paragraphs, drawing on other CA2020 papers.]

 

 

IV.       DESIRABLE ECONOMY-WIDE AND SECTORAL REFORMS

 

A.        Overview

 

The process of economic development is too complex for economists to tackle by themselves.  The widening inequalities associated with Latin American countries' recovery from the debt crisis of the 1980s (Berry 1997; Bulmer-Thomas 1996) have made clear that blind faith in markets is misplaced.  Successful, sustainable responses to the challenges of globalization require national strategies focused, in an integrated manner, on four interrelated goals: (1) economic growth, (2) poverty reduction, (3) environmental protection, and (4) participatory democracy.  In addition, deeper and broader regional integration can make the Central American countries' participation in the world economy more effective.

 

 

B.        Economic Growth

 

Economic growth is not just an end in itself.  It is the most important factor contributing to poverty reduction over the long run; it facilitates (but does not guarantee) the solution of some environmental problems (while aggravating others); and it can create (but again not guarantee) opportunities for more people to participate in democratic processes that encompass far more than free and fair elections.

 

A key determinant of economic growth is the amount and productivity of investment, and in particular private investment.  While governments still have a key role to play in providing basic infrastructure, it is now widely accepted that private investors are generally more efficient than bureaucrats as enterprise managers.  Since 1980 Central American governments, to varying degrees, have privatized or dismantled many state enterprises, receiving one-time payments for assets sold and eliminating the annual fiscal burdens of operating (and capital) subsidies.

 

For some countries, the case for privatization extends beyond directly productive activities to encompass infrastructure.  Heavily indebted Honduras and Nicaragua, in particular, have little capacity to provide new basic infrastructure because of insufficient domestic resources and their inability to contract non-concessional external loans.[27]  In order to achieve more than moderate economic expansion over the next two decades, they will have to both increase public savings rates and permit greater private investment in infrastructure.

 

Macroeconomic policy.  An essential requirement for stimulating private investment--and both private and public savings--is a sound macroeconomic policy that avoids large imbalances, both internally (fiscal accounts) and externally (current account of the balance of payments).  The key requirement here is to achieve good performance, not for just a few years, but on a reasonably consistent basis over time.  In the words of the OECD's 2020 document (1997:16):  "Stable and sustainable macroeconomic policy will be a precondition for taking full advantage of the opportunities provided by globalisation, as well as for successful structural reform."

 

Macroeconomic stability minimizes domestic inflationary pressures and exchange-rate fluctuations, reducing risks and uncertainties faced by private investors.[28]  It is also worth noting that controlling inflationary pressures is particularly beneficial for the poor.[29]

 

Albert Fishlow (1997:405) has observed that Latin American countries have finally learned the importance of responsible fiscal and monetary policy as a central condition for economic development."  In Central America, Costa Rica absorbed this lesson much sooner than its neighbors, initiating in the latter half of 1982 a major program (implemented gradually) of macroeconomic stabilization and structural adjustment.  Guatemala followed in 1986, while El Salvador (1989), Honduras (1990), Nicaragua (1991) were late converts.  [Identify dates for Panama and Belize.]

 

Implementation of macroeconomic stabilization programs in Central America has not always proceeded smoothly.  Costa Rica has lost macroeconomic discipline on several occasions, and fiscal laxity in Honduras in 1992-93 contributed to a severe recession in 1994.  Nevertheless, in nearly all such cases, macroeconomic discipline was restored relatively quickly, and in general fiscal and monetary policy in the 1990s has been much better than in the 1980s.  While macroeconomic policy can still be improved, it seems unlikely to be a major obstacle to Central American economic growth in the next two decades.

 

 

Financial-sector reforms.

 

            [--  Recent Asian crisis illustrates importance of reforms in this area.]

 

            [--  See Kaminsky and Reinhart re relationship between financial liberalization, banking crises, and currency crises.]

 

            [--  Pension reform.]

 

 

Reform of the State.

 

            "Privatisation, the legal framework for enterprises, regulatory reform and tax and competition policy are all important areas for reform efforts.  In conjunction with strong macroeconomic policies and financial management, reforms in these areas will lay the bases for internationally-competitive domestic enterprises and help attract FDI [foreign direct investment], thus building up the linkages with the global economy" (OECD 1997:20).

 

            [--  Also important: improving the efficiency and efficacy of government programs, especially in the social sectors.]

 

 

Sectoral policies.

 

            [--        agriculture]

 

            [--        manufacturing]

 

            [--        maquila operations]

 

            [--  Need for a long-run strategy to begin converting maquila operations into true manufacturing activities]

 

            [--        tourism]

 

            [--        other services]

 

 

 

C.        Equity

 

            [--        investment in human capital]

 

            [--        better-targeted subsidies]

 

            [--        improved access by poor households to the factors of production]

 

 

D.        Environmental Sustainability

 

            [--        green, blue, and brown issues]

 

            [--        disaster preparedness]

 

            [--        importance of attention to this area for access to the FTAA]

 

 

 

E.         Participatory Democracy

 

            [--        consolidating electoral reforms]

 

            [--        improved administration of justice]

            --          including fair administration of legislation regarding property rights

 

            [--        personal security issues]

 

            [--        decentralization of government programs]

            --          as a practical solution, not one driven by religious zeal

 

            [--        strengthening civil society]

            --          including social auditing of development programs

 

            [--        equality of opportunity for women and minority groups]

 

            [--        freedom of association (for labor unions, peasant organizations, etc.]

 

 

F.         Regional Economic Integration

 

            [--        Incorporation of the agricultural and services sectors]

 

            [--        Access to the FTAA is likely to be more feasible for Central America as a group than for individual countries]

 

 

V.        ALTERNATIVE VISIONS OF CENTRAL AMERICA'S ECONOMIC STRUCTURE IN 2020

 

            [--  These visions will depend on:

            --          The performance of the world economy (the OECD's high-growth and low-growth scenarios

            --          The extent of policy reform in Central America]

 

 

VI.       POLICY RECOMMENDATIONS FOR MORE EFFECTIVE DEVELOPMENT ASSISTANCE

 

            [To be added]

 

REFERENCES (Partial)

 

 

Ardito-Barletta, Nicolás.  "Investment Opportunities in the Former Canal Zone."  Balboa, Pan.: Autoridad de la Región Interoceánica [ARI], June 1998.

 

Berry, Albert.  "The Income Distribution Threat in Latin America."  Latin American Research Review 32, No. 2 (1997):3-40.

 

Bulmer-Thomas, Victor, ed.  The New Economic Model in Latin America and Its Impact on Income Distribution and Poverty.  New York: St. Martin's Press, in association with the Institute of Latin American Studies, University of London, 1996.

 

_______.  The Political Economy of Central America since 1920.  Cambridge, Eng.: Cambridge University Press, 1987.

 

Croome, John.  "The Present Outlook for Trade Negotiations in the World Trade Organization."  Policy Research Working Paper 1992.  Washington, D.C.: World Bank, October 1998.

 

Díaz-Bonilla, Eugenio and Robinson, Sherman, eds.  "Getting Ready for the Millennium Round Trade Negotiations."  Focus, No. 1.  Washington, D.C.: International Food Policy Research Institute, April 1999.

 

Emmerij, Louis, ed.  Economic and Social Development in the Twenty-First Century.  Baltimore:  Distributed by The Johns Hopkins University Press for the Inter-American Development Bank, 1997.

 

Fishlow, Albert.  "Latin America in the XXI Century."  In Economic and Social Development in the Twenty-First Century, ed. Louis Emmerij.  Baltimore:  Distributed by The Johns Hopkins University Press for the Inter-American Development Bank, 1997.  Pp. 405-418.

 

Honduras, República de.  Grupo Interinstitucional.  Situación de la industria bananera hondureña.  Tegucigalpa: Unidad de Análisis de Políticas Económicas [UDAPE], August 1994.

 

Inter-American Development Bank [IDB].  Economic and Social Progress in Latin America: 1989 Report.  Washington, D.C., 1989.

 

International Food Policy Research Institute [IFPRI].  Feeding the World, Preventing Poverty, and Protecting the Earth: A 2020 Vision.  Washington, D.C., 1996.

 

International Monetary Fund [IMF].  El Salvador: Recent Economic Developments.  IMF Staff Country Report No. 98/32.  Washington, D.C.: April 1998.

 

Kaminsky, Graciela L. and Reinhart, Carmen.  "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems."  American Economic Review 89, No. 3 (June 1999):473-500.

 

Lawrence, Robert Z.; Rodrik, Dani; and Whalley, John.  Emerging Agenda for Global Trade: High Stakes for Developing Countries.  Policy Essay No. 20.  Washington, D.C.: Overseas Development Council, 1996.

 

Organisation for Economic Co-operation and Development [OECD].  21st Century Technologies: Promises and Perils of a Dynamic Community.  Paris, 1998.

 

_______.  The World in 2020: Towards a New Global Age.  Paris, 1997.

 

[Panama, Republic of.]  Autoridad de la Región Interoceánica [ARI].  Panama: Putting a Global Hub to Work—Centro de Comercio Internacional.  Balboa, Pan., n.d.

 

Paus, Eva.  "Exports, Economic Growth and the Consolidation of Peace in El Salvador."  World Development 23, No. 12 (December 1995): 2173-2193.

 

Preeg, Ernest H.  From Here to Free Trade: Essays in Post-Uruguay Round Trade Strategy.  Washington, D.C.: Center for Strategic and International Studies; Chicago: University of Chicago Press, 1998.

 

Reinhart, Carmen and Wickham, Peter.  "Commodity Prices: Cyclical Weakness or Secular Decline?"  IMF Staff Papers 41, No. 2 (June 1994):175-213.

 

Rodrik, Dani.  The New Global Economy and Developing Countries: Making Openness Work.  Baltimore: The Johns Hopkins University Press for the Overseas Development Council, 199[X].

 

Siri, Gabriel, with the collaboration of Vilma de Calderón.  "Uso productivo de las remesas familiares en El Salvador."  Documento de Trabajo No. 42.  San Salvador: Fundación Salvadoreña para el Desarrollo Económico y Social [FUSADES], January 1996.

 

Vargas, Lucinda. "The [Mexican] Maquiladora Industry in Historical Perspective (Parts I and II)."  Business Frontier (Federal Reserve Bank of Dallas, El Paso Branch), Issues 3-1998 and 4-1998.

 

Zuvekas, Clarence, Jr.  "Alternative Perspectives on Central American Economic Recovery and Development [Review Essay]."  Latin American Research Review 27, No. 1 (1992):125-150.

 

_______.  "Changing Patterns in Central America's Exports, 1980-1995."  Revised version of a paper presented at the 17th Annual Conference of the Middle Atlantic Council of Latin American Studies, Bucknell University, Lewisburg, Pennsylvania, March 29-30, 1996.