CAFTA Voting Record for Representatives

InterAction, February, 2004
for more information, contact Vincent McElhinny at vmcelhinny@interaction.org

Trade Liberalization has already occurred in Central America. Tariff levels have dropped and imports have surged dramatically in the 1990s. In the region’s poorest country, Nicaragua, the average tariff has dropped from 43.2% to 5% in less than a decade. But has development followed?

Export Growth – Exports more than doubled in the 1990s (from $5 to $15 billion), but imports rose even faster. An increased reliance on remittances and ‘replacement migration’ is now required to finance the Central American trade deficit.

Economic Growth – Growth has been relatively stagnant, compared to the 1970’s growth rate of 6% (2.7% per capita). In the “lost decade” of the 1980’s growth averaged only 1%; in the 1990s growth rose to 4.1% (1.8 % per capita), but has been flat since 1997 and well below the East Asian average of 7% for the last three decades (IDB 2002)

Foreign Direct Investment (FDI) – On average, Central American countries have seen an increase in FDI of $375 million per year (1998-2000). However this investment was driven largely by privatization, biased toward construction rather than productive fixed investment and domestic savings – which remain far below levels necessary for sustainable development. Few forward and backward linkages were created. Export oriented investment (ie. Maquilas) use of local inputs remains minimal.

Productivity – Total factor productivity rates have actually fallen in Central America over the past decade, especially in the agricultural sector (IDB Research Dept, 2002). Total Factor Productivity Growth 1991-2000 has been disappointing, for Costa Rica ( +0.2%), Guatemala ( - 0.5%), El Salvador (- 0.85%), Nicaragua ( -1.6%) and Honduras (- 1.95%)

Competitiveness – Central American countries rank close to last on the World Economic Forum’s Growth Competitiveness Index (El Salvador ranks 48 & Costa Rica ranks 51, and Guatemala, Nicaragua and Honduras rank 89,90 and 94 out of 102 countries.)

In sum, increased dynamism and diversification in Central American exports in the 1990s have not jumpstarted the Central American economies. Growth, in turn, has not increased fast enough to significantly reduce poverty and inequality, create jobs, or stem environmental degradation. Liberalization has instead been associated with rising levels of criminal violence, social and political instability and the hollowing out of democracy.

Poverty – Trade liberalization has failed to lower poverty - the principal Millennium Development Goal. Relative poverty in the region is 55%, and 2 or every 3 Central Americans in rural areas are poor.

Inequality – Trade liberalization has increased income inequality in the region, even in Costa Rica. Central America has sustained one of the highest levels of income inequality in the world, with a Gini coefficient of 0.55. A recent agrarian census in Guatemala shows that the distribution of land is essentially unchanged since 1979. Trade has also failed to diminish the gap between Central America and the North, or between rural and urban areas. Central America, in terms of GDP per capita, lost ground relative to the U.S. over the past 25 years.

GDP per capita

(CA/US as %)          1975          1999
Costa Rica                  29          27
El Salvador                 23          13.5
Guatemala                  17          12
Nicaragua                   25          7
Honduras                    22          18

Jobs – 600,000 Central American jobs have been permanently lost to the coffee crisis out of a rural labor force of 6 million. The maquila sector has leveled off at 400,000 jobs out of a total labor force of 13 million. The only increase in employment has been in the informal sector, which now represents 60% of the region’s workforce.

Hunger – In Central America, indices of malnutrition, measured by average weight and height, have increased in Nicaragua, Honduras and Costa Rica. The World Food Program 2002 Report states that 8.6 million Central Americans (1 in 4) continue to suffer from hunger or food insecurity.

The downsizing of the Central American state – In the view of the IDB (2002), the shrinking state has crippled its capacity to carry out its basic functions, such as enforcing the rule of law, collecting taxes and promoting the health and education of people entering the work force.

Weak State Fiscal Authority – Central American capacity to collect taxes remains far below expected levels relative to similarly developed countries. The IDB shows that Central Americans should be collecting about 15% of their GDP in taxes, while the actual level is about 10% of GDP. Despite a decade of reforms, the 1990s have seen public investment levels remain well below (-25 to –60%) expected levels.

Corruption - The most recent Corruptions Perception Index (CPI) released by Transparency International show that the corruption remains very high, and in the cases of Costa Rica, Guatemala and Honduras – is worsening. Of 133 countries ranked, Costa Ricas occupies position 46, El Salvador 59, Panama 66, Nicaragua 88, Guatemala 100 and Honduras 106. (www.transparency.org)

Debt – Massive bailouts of a failing financial sector and rising internal and external debt have wiped out the HIPC debt forgiveness gains of Nicaragua and Honduras. After a decade of capital accounts liberalization, Central America has accumulated nearly $10 billion in unsustainable, additional debt.

Education not growing fast enough – Central America continues to under invest in education, spending about 2.4% of its GDP on education, while the IDB estimates that the region should be spending at least 4%. As a result, the education gap between Central America and the world is growing. Most of Central America is not on track to meet the MDG in Education, and even in Costa Rica students are dropping out of secondary school in record numbers.

Rule of Law/Crime/Violence – Social Violence has reached epidemic proportions, now approximating the worst political violence of the civil war years in several countries.

% Pop. Victimized Homicide Rate
by Property Crime per 100,000 pop. (1996-2000)

Guatemala                  54.9                 35
El Salvador                 47.1                 93
Honduras                    36.3                40
Nicaragua                   35.7                10.5
Costa Rica                  32.7                  9.7
Mexico                       47.9                19.6
Colombia                    37.4                 76
LatAm/Carribean          30.0                 30
US                            10.0                 10

Hollowing out of Democracy: The fragile process of democratization is threatened by the non-democratic formulation of development policies (like trade) and the lack of any perceived economic payoff after nearly a decade of reforms. Latinobarometer surveys of Central America report an alarming deterioration in support for recent political and economic reforms that trend in the wrong direction.

Migration & Remittances: Recent studies have shown that increased labor mobility would generate greater financial benefits for poor countries than free trade. Four of the five countries increasingly rely on migration and remittances as a de facto social policy and to cover an expanding trade deficit with the U.S. The primary export for Central America has become labor. Some 200,000 – 300,000 Central Americas attempt to migrate to the U.S. through legal and illegal means every year. Macroeconomic stability is now and will continue to be dependent upon the $5.5 billion sent home annually from the U.S., more than foreign direct investment, official development assistance and external lending combined.

Sources: IDB & World Bank Country Strategies, Program Evaluations; Agosin, Manuel, Roberto Machado and Paulino Nazal (November 2002)
“The Economies of Central America and the Dominican Republic: Evolution and Long Term Challenges,” IDB Sector Study RE2-02-001; World Bank Development Indicators (2003); Latinobarometer (2002); Salazar-Xirinachs José M. and Jaime Granados (May 2003) “The United States-Central America Free Trade Agreement: Opportunities and Challenges”; Juan Luis Londono, Alejandro Gaviria, and Rodrigo Guerrero (2000) Asalto al Desarollo: Violencia en America Latina. IDB; Latinobarometer, 2002