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Trade, Violence and Hope in Central America

Central America occupies one of the world's more strategic locations. It is very much the central zone between an industrialized North and an industrializing South America. As such its historical socioeconomic development was and continues to be strongly influenced by external forces. On the positive side of this equation, trade within the region of seven countries (Belize, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama) has grown, as have overall exports to both North and South America. On the negative side of the equation, Mexico's effort to curb its drug cartels has led to the spread of transnational crime throughout its southern neighbors, which, along with still-high levels of poverty, has made Central America one of the most deadly places in the world. The collision of these two forces has the potential to lead Central America, in particular El Salvador, Honduras and Guatemala, into a more challenging economic landscape. It does not have to be that way.

Central America - Selected Indicators

During the 1980s, Central America was a major U.S. media focus, a place where the Cold War went "hot." The U.S. and Soviet Union as well as Cuba poured resources into the region. The end of the Cold War, however, changed Central America's dynamics. Peace accords ended conflicts in Nicaragua (1990), El Salvador (1992) and Guatemala (1996). It was hoped that, once peace descended upon the region, economic growth would follow, trade would increase, foreign investment would flow and poverty would fall. The results were mixed, with a divide of sorts emerging between Panama and to a lesser extent Costa Rica vis-Ã -vis Belize (having default problems), Nicaragua, Honduras, El Salvador and Guatemala.

While there are deep concerns about Central America, the region has made some important gains on the trade front. According to the World Bank, trade across the region as a share of GDP grew by 8% between 2000 and 2011. Indeed, the Central American Economic Integration Secretariat observed that exports as a whole have grown more than 11% in the last decade. Although Central America is a small market of 43 million people and accounts for a small 0.25% of global GDP, the region has been aggressive in signing up free trade agreements, such as with the United States (the CAFTA-DR agreement signed in 2004), the destination of 32% of its exports.

Trade has helped maintain momentum for economic growth, especially in Panama, Costa Rica and Guatemala. According to the International Monetary Fund, real GDP growth moved along at 4.8% in 2012, with 4.4% forecast for 2013 and 4.1% in 2014. Panama is the outlier - real GDP growth is expected to be close to 9% in 2013, driven by trade (most of which is with the U.S.) and investment (linked to the canal's construction of a new canal). The most challenged economy is that of Belize (real GDP is expected at 2.3%), which is struggling with external debt problems. Inflation has run a little high throughout the region, but remains under control.

Central America - Basic Economic Data

For all of the gains in trade, the picture is complicated by a number of factors. Because of sizable imports, Central America's current account balance of payments deficit is moderately high, running at 6.6% in 2012 and projected at the same in 2013, before falling in 2014 to 6.3 % of GDP. This also points to the need to improve export prospects, something that would be greatly improved by upgrading regional infrastructure. While Panama's infrastructure geared to trade, i.e. the Panama Canal and the Colon Free Trade Zone, is well-developed, other countries suffer inadequacies in such areas as harbors, electricity grids and airports.

It is roads that loom large over this picture. While shipping is important in getting Central American exports to their markets, inter-regional trade remains dominated by road transportation. It is the major means of trading goods within the region. As such, road transportation is exceedingly expensive in the region due to high fuel prices, transfer of empty containers (goods go in one direction but not in the other), excessive travel times and costly transport and customs clearance expenses. According to World Bank data studying five trade corridors in Central America, logistics bottlenecks add time needed to transport a product from the storage center to the nearest port on the Atlantic coast by as much 21% in Panama and up to 60% in Nicaragua and El Salvador.

The other obstacle to trade in Central America is security. The World Bank calculates that security represents between 3% and 4% of Central American transportation companies' costs. The multilateral development bank noted: "High quality beef and coffee exporters must pay a security car or armed guard to accompany vehicles during transportation... Meanwhile security costs have risen by 25% in the past four years and are susceptible to further increases as crime and violence grow."

The issue of violence in Central America cannot be overlooked. Ana Arana, a well-known journalist, observed in Foreign Affairs in late 2001: "Today the region's seven small republics, rather than exhibiting the new harmony and prosperity that were expected to come with peace, bear only the scars and open wounds of traumatized societies rampant corruption, gang warfare, drug smuggling, intense urban poverty and overpopulation, and neglect from the international community." Sadly, elements of her 2001 description are still readily evident in 2013.

Central America's problems stem in part from weak political institutions that struggle to cope with transnational crime, inadequate resources and, at times, natural disasters (like earthquakes, floods and volcanoes). Probably the worst of the scourges is the crime-related violence. In this, Honduras is statistically the worst. The small Central American country is increasingly regarded as on the brink of being a failed state. Since the 2009 ousting of its president by the military on the orders of the Congress and Supreme Court, conditions in Honduras have gone from bad to worse. The rule of law remains tenuous and the government's legitimacy has been seriously eroded.

The violence is a major society-wide problem that overshadows the country. According to the National Autonomous University, in 2012 there were 86 murders per 100,000 people, meaning that Honduran men in their 20s faced a 1-in-300 chance of being murdered, or a 1-in-150 chance in the most dangerous towns. San Pedro Sula, in northwest Honduras, was at the top of a list of the world's 50 most violent cities, compiled by the Mexican think tank Citizen Council for Public Security, Justice and Peace, earning it the title of “murder capital of the world."

Part of the violence issue in Honduras is related to transnational crime. Mexican President Felipe Calderon, who was in office from 2006 to 2012, focused on the arrest of drug cartel kingpins and depended heavily on the armed forces. While this policy put the Mexican cartels under intense pressure (and upped the levels of violence inside Mexico), it had the adverse effect of pushing some of these criminal organizations to the south, where weak governments struggled to deal with often-times better-armed and wealthy criminal groups. Along these lines, the U.S. government's annual International Narcotics Control Strategy Report (INCSR) for 2013 observes: "Honduras is a major transit country for cocaine, as well as some chemical precursors, and synthetic drugs. The United States estimated that more than 80 percent of the primary flow of the cocaine trafficked to the United States first transited through the Central American corridor in 2012. The United States also estimated that as much as 87 percent of all cocaine smuggling flights departing South America first land in Honduras. The Northern Atlantic coastal region of Honduras is a primary landing zone for drug-carrying flights."

While Honduras loomed large, Guatemala also was a target, in part due to a shared porous border with Mexico and widespread corruption. In the March 2013, the INCSR noted: "Guatemala remains a major transshipment point for drugs destined for the United States. The United States estimated that more than 80 percent of the primary flow of cocaine trafficked to the United States first transited through the Central American corridor in 2012."

The problem, however, is not limited to Guatemala. El Salvador has a well-developed gang system, dominated by two major groups with members in the United States, Barrio 18 and Mara Salvatrucha (MS-13). Costa Rica, Nicaragua and Belize are not immune from the drug trade and Panama has long been forced to deal with money laundering and drug transiting issues.

Central America has considerable potential. While it benefits from a geo-economic location between the industrialized North and the rapidly industrializing South, it also has fertile soil, the ability to grow a wide variety of crops (both for domestic consumption and export), abundant natural resources (nickel, iron ore, fish and oil) and a youthful population. While countries like Brazil, Chile, Colombia, Mexico and Peru have put these same factors to work, much of Central America has not. The need to deal with transnational crime is considerable and, with this, Central American needs help, some of which it is receiving from the United States. It also needs more help with upgrading infrastructure to help unlock greater opportunities in trade. Better roads, harbors and electricity reinforce and bolster the legal economy and give people hope beyond the daily grind of violence.


This article originally appeared in The Global Economic Reporter, published by MC Asset Management Holdings, LLC, a subsiduary of Mitsubishi Corporation


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