After a so-called lost decade in the 1980s, when civil conflicts and economic disruption paralyzed the region, Central America has made great strides in embracing peace, democracy, and market-oriented reforms. Nevertheless, poverty remains widespread, key institutions need bolstering, and regional cooperation is still at an early stage in many areas.
An IMF book forum on July 21 took up the region’s prospects, showcasing a new Occasional Paper (see box) and drawing on the perspectives of two ambassadors and a Washington-based policy analyst.
As background for the discussion, Markus Rodlauer and Alfred Schipke (IMF Western Hemisphere Department and editors of the Occasional Paper) reviewed the economic, social, and political context in which policymaking is taking place. Also discussed were the macroeconomic implications of a free trade agreement between the region, the Dominican Republic, and the United States (CAFTA-DR), which holds the promise of further economic integration and strengthened competitiveness in global markets.
Trade, investment, and growth
Rodlauer and Schipke noted that CAFTA-DR has the potential to increase trade, investment, and growth, and lower output volatility. But capturing these benefits will require reforms to improve the environment for private investment, in particular by strengthening institutions and the rule of law. They also stressed the need to shore up fiscal revenues (notably through improved tax coordination within the region) and address high public debt levels (except in Guatemala). Strong supporting measures, they said, hold the key to bringing home the benefits of integration.
For Salvador E. Stadthagen, Nicaragua’s Ambassador to the United States, the IMF study confirmed his expectations that the agreement would boost foreign direct investment (FDI). “For Nicaragua, where the capital base is very shallow,” he said, FDI is indispensable. He also saw the agreement as a key signal of commitment and support to the region from its largest trading partner—thereby underpinning the democratic and market-oriented policy frameworks in place.
José Guillermo Castilla Villacorta, Guatemala’s Ambassador to the United States, pointed to the Caribbean Basin Initiative of 1983, which had produced a fivefold increase in trade with the United States and a “huge diversification of exports.” He emphasized the real opportunities for the poor offered by CAFTA-DR and the exportoriented growth strategy it embodies. Quoting a countryman, he observed that “we have been planting corn and beans for the past 100 years, and we have not been able to get out of poverty. This now is a real opportunity.” He also hoped the pact would foster good governance, help strengthen institutions, and increase cooperation among nations.
Peter Hakim, president of Inter-American Dialogue, praised Central America’s recent economic—and social—progress, but termed it still “widely inadequate.” He also voiced concerns that peace and democracy were still fragile in the region. Nevertheless, he saw in CAFTA-DR an opportunity to raise growth, promote integration, and strengthen reform. But will its benefits help reduce poverty or simply accrue to a small elite? That, he said, was a crucial issue on which much of the success of CAFTA-DR would hinge.
Copies of Occasional Paper No. 243, Central America: Global Integration and Regional Cooperation, are available for $25.00 each ($22.00 academic rate) from IMF Publication Services. See this page for ordering details.
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