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Analysis II
Last Updated: 06/01/2010
Pragmatism and Integration for Central America’s Economic Future: Exercising Freedom of Choice
Tara Ruttenberg

Urging pragmatism toward advantageous relations and sustainable fair trade practices with new economic allies while targeting equitable domestic development strategies, this piece identifies key policy areas where Central America is set to benefit most from its strategic positioning in the Americas and within the wider global economy. In light of the economic shortcomings and detrimental social implications associated with free trade agreements and historical dependency on the United States, this set of policy recommendations seeks a new approach. In short, Central American leaders, while eager at the opportunities, must practice caution in opening to new markets in China and Europe, while at the same time strengthening regional integration within Central America and with the rest of Latin America through bilateral and multilateral approaches geared toward diversification, wealth redistribution and economic growth with sustainable social equity.


Characterized in political economy terms by a reliance on traditional agricultural exports, dependency on foreign markets, extreme socio-economic inequality, and shifting political-ideological affinities between neoliberal models and state-led policies, the region of Central America has proven resilient in its ability to attract investment and trade relationships with a new variety of players. As a geographic bridge between the Americas, Central America’s position is of both geopolitical and economic interest to existing and emerging leaders in today’s increasingly multi-polar global economy, namely China, the European Union, the United States and ALBA member countries led by oil-fueled powerhouse Venezuela.[1][2][3]

Urging pragmatism toward advantageous relations and sustainable fair trade practices with new economic allies while targeting equitable domestic development strategies, this piece identifies key policy areas where Central America is set to benefit most from its strategic positioning in the Americas and within the wider global economy. In light of the economic shortcomings and detrimental social implications associated with free trade agreements and historical dependency on the United States, this set of policy recommendations seeks a new approach. In short, Central American leaders, while eager at the opportunities, must practice caution in opening to new markets in China and Europe, while at the same time strengthening regional integration within Central America and with the rest of Latin America through bilateral and multilateral approaches geared toward diversification, wealth redistribution and economic growth with sustainable social equity.

Pragmatism in New Economic Partnerships

In the past year, with presidential elections in three of the six Central American countries (Panama, Costa Rica and El Salvador) plus an unlawful right-wing coup government established in Honduras[4], the region’s political landscape continues to evolve—and with it have emerged new economic opportunities as foreign nations vie for influence in the region. The Association Agreement under negotiation with the European Union offers increased market access for Central American agricultural exports through trade liberalization and favorable terms for financing with the potential creation of a Common Credit Fund as encouraged by Nicaragua’s President Daniel Ortega.[5] Free trade talks between China and Costa Rica reflect China’s increasing interest in the region; however, the rest of Central America has not yet received the same attention from the emerging economic giant given competition in the textile sector and their ongoing diplomatic relations with Taiwan.[6] ALBA leaders continue to court Central American leftists, although Nicaragua has been the only one to outwardly embrace ALBA, reaping the benefits of Venezuelan agricultural export markets and investment in energy and social development projects.[7] Alternatively, Salvadoran president Mauricio Funes has made clear his intentions to keep his country independent of the alliance despite the FMLN party’s wishes, and Honduras recently opted out.[8] On a slighter scale, Nicaragua’s bilateral economic partnerships with Russia and Iran have allowed for increased ‘South-South’ cooperation on healthcare, hydro-electric energy, telecom and public transport.[9] Finally, while US political influence wanes throughout region, Central America’s northern neighbor continues to be its largest export market for agriculture and textiles, and FDI, remittances and private capital flows are still a principal source of income for Central American economies. In addition, CAFTA has been signed by all six Central American states plus the Dominican Republic and implemented by all except Costa Rica.[10]

With all of these international partnerships on the horizon, Central American nations find themselves in a unique historical position to strategically envision their economic futures based on opportunity and national interest rather than necessity. Dependency on the United States and accepting less-than-favorable terms of trade have given way to new export markets for traditional and new agricultural products, improved access to a wider range of private and foreign direct investment options and credit programs to finance development projects. As Central America moves forward with negotiations, they are ripe to exercise a freedom denied them for centuries past; a freedom they are finally in a position to enjoy: the freedom of choice.

Economic Growth and Development on Their Own Terms

First, learning from the detrimental socio-economic implications associated with the asymmetrical free trade experience of neighboring Mexico under the terms of NAFTA, it is time for Central America to realize that CAFTA ‘as-is’ is not in their best interest.[11] Renegotiating the terms of CAFTA is the first step, including removing contradictory protectionist clauses that seek to insulate US agricultural producers against cheaper imports from Central America, strengthening labor rights and environmental protection standards, re-envisioning intellectual property rights in pharmaceuticals and food, increasing incentives for value-added production in the region while protecting small- and medium-sized local agricultural enterprises over foreign-owned multinationals, and emphasizing favorable terms of trade on textiles to strengthen competitiveness in US markets vis-à-vis China. These measures would help correct some of the ills of trade asymmetry while still pursuing optimum growth strategies, strengthening local production capacity in rural agricultural sectors, ensuring domestic food security and access to low-cost pharmaceuticals, and protecting labor and the environment.

Central American leaders must pursue similar negotiations in other economic partnerships, exercising pragmatism to meet domestic needs while opening to new foreign markets. As described above, Nicaragua provides a compelling, if not controversial, example of the benefits of seeking a pragmatic approach to international economic alliances, and the rest of the region would bode well to follow suit. Specifically, negotiating further liberalization in agriculture with the European Union to remove protectionist clauses against sugar and bananas[12] and, at the same time, tacking on clauses to maintain European financing for social development[13], infrastructure and capacity building would maximize Central America’s gains under the Association Agreement. A key challenge remains regarding how to lure-in China without alienating Taiwan, and the jury’s out on whether or not those policy objectives are mutually exclusive. Engaging new nontraditional markets for investment capital and commodity exports could also prove beneficial, providing alternate financing for development projects in the region. Through negotiating favorable and diversified partnerships, Central American nations will be able to assert their economic and political independence, safeguarding against replacing dependency on one economic giant with dependency on another.

Domestic economic policies can help complement improvements in international trade policy, particularly in the areas of tax reform and public expenditures to target income redistribution and ensure that gains in growth benefit poor and middle-income citizens. In particular, implementing a national tax on remittances and adjusting public spending toward development and services in low-income urban zones and poor, isolated rural counties while capping privatizations in health and education will help to reverse the growing trend of social inequity and provide quality services where they are needed most. In addition, harnessing profits from the growing tourism industry and re-investing them in job creation strategies in non-tourist sectors will minimize tourism’s disproportioning tendency to concentrate wealth in tourist areas while the rest of the economy suffers. Instead, taxing tourism and reinvesting in other sectors will help develop new skill sets and incentives for workers, employing the unemployed and providing viable alternatives to the informal economy in non-tourist zones.

Regional Integration

In questions of energy and food security, sustainable development and environmental cooperation, enhanced regionalization is proving highly beneficial for Central America, and further integration will help tackle shared challenges in drug trafficking, urban violence, gangs, environmental degradation, poverty and social inequality. While we cannot ignore political-ideological differences that contribute to Central American leaders’ desire to keep ALBA relations at an arm’s length, it would behoove these countries to reconsider economic links with ALBA in order to improve access to development finance and energy options. As the Bank of the South, Petrocaribe and ALBA offer multilateral means of regional cooperation in energy, food security and social development projects, Central America cannot afford to miss out on these opportunities for growth and development. The challenge, however, will be to meet conventional energy security needs while still pursuing renewable strategies geared toward sustainability rather than increasing the region’s reliance on oil and natural gas. In exchange for development financing and energy, Central American agricultural exports to the rest of Latin America, including Cuba and Venezuela, will expand growth potential and contribute to a shared sense of responsibility toward satisfying food demand for the region’s poor, at the same time helping to relieve dependency on food imports from outside the region.

Finally, Central American integration is a significant area where cooperation on security and development initiatives would target common challenges, going well beyond the scope of the Esquipulas II Agreement’s focus on export-led growth.[14] Alternatively, the formal Central American Integration System (SICA) is a good starting point for regional cooperation, especially for collaborative environmental research and development.[15] However, SICA’s limited implementation is its principal weakness, despite valuable institutional infrastructure already in place, including Social and Cultural Integration offices, the Central American Court of Justice and the Central American Alliance for Sustainable Development (ALIDES). It is up to the region’s new leaders to strengthen cooperative efforts through these and new institutions as part of SICA to effectively implement region-wide development policies, heighten security efforts against drugs and human trafficking across borders, target urban violence, crime and gangs, and develop strategies of poverty alleviation in rural and urban areas. Additionally, the Central American Bank for Economic Integration is another outlet for directing finance toward regional projects in infrastructure, energy, and agriculture.[16] Common socio-economic challenges across the region require a coordinated regional response, and increased policy integration among Central American governments would strengthen each country’s independent efforts to target these problems.



[1] ALBA is the acronym for the Bolivarian Alternative to the Americas, a regional economic integration alliance among Cuba, Bolivia, Venezuela, Nicaragua, Dominica, Honduras (opted out Jan 2010), San Vincent and the Grenadines, Ecuador, Antigua and Barbuda, created as an alternative to the neoliberal Free Trade Agreement of the Americas (FTAA/ALCA) introduced by the US. Bilateral and regional agreements under ALBA include cooperation in energy (oil, natural gas), food security, culture (ALBA houses), finance and banking (ALBA Bank, forgiving debt, forming a regional currency), social development ($10 million social program donation to Nicaragua, plus Child Development centers, for example), healthcare (Cuban doctors, eyesight restoration), education (student exchanges, eradication of illiteracy in Nicaragua, Cuba, Venezuela) and security.

[2]“The EU’s relations with Central America.” http://ec.europa.eu/external_relations/ca/index_en.htm. The San Jose Dialogue in 1984 was the starting point to European-Central American relations, and now the EU and the six Central American countries are negotiating an Association Agreement set to be finalized in May 2010.

[3] China has formally engaged Costa Rica through free trade negotiations, and continues to “wait patiently” to develop trade relations with the rest of Central America, stalling on the issue of the regions ongoing diplomatic relations with Taiwan. Erikson, Daniel. “China's Strategy toward Central America: The Costa Rican Nexus” Jamestown Foundation China Brief, Vol. 9, Iss. 11, May 27, 2009. http://www.thedialogue.org/page.cfm?pageID=32&pubID=1968.

[4] Hakim, Peter. “Obama Administration Policy in Latin America. Year II. March 10, 2010. Testimony to the US Subcommittee on the Western Hemisphere. From Inter-American Dialogue. http://www.thedialogue.org/page.cfm?pageID=32&pubID=2298. Hakim writies, “The initial response of the OAS, supported by every member government (including the U.S.) failed to reverse the Honduran coup and return President Manuel Zelaya to power.” Election observation reports for the ensuing Honduran presidential elections in November 2009 point to widespread voter repression and threats, plus general abstentions from Zelaya’s large popular support base, leading to the majority of the international community’s decision not to recognize the new right-wing government of Porfirio Lobo, with the notable exception of the United States who recognized the Lobo government immediately following the election, at odds with all OAS member states. However, four months following these elections, Hakim writes, “Although some bitterness remains, the Honduran crisis may finally be nearing resolution, as more and more countries accept the legitimacy of the Lobo government.” It is argued that Hakim’s assertion on this point is still very much up for debate.

[5] Rojas-Romagosa, Hugo and Luis Rivera. “Economic Implications of an Association Agreement between the European Union and Central Amerca.” IIDE Discussion Paper 200708-01 200708-01 , October 2007. http://www.i4ide.org/content/wpaper/dp20071001.pdf.

[6] Erikson, Daniel. “China's Strategy toward Central America: The Costa Rican Nexus” Jamestown Foundation China Brief, Vol. 9, Iss. 11, May 27, 2009. http://www.thedialogue.org/page.cfm?pageID=32&pubID=1968

[7]Sugget, James. “Venezuela and Nicaragua Progress on Food Security, Refinery and Public Health”. April 15, 2010. http://venezuelanalysis.com/news/5278

[8] Sugget, James. Honduras Withdraws from ALBA, El Salvador Won’t Join Despite FMLN Support.” January 15, 2010. http://venezuelanalysis.com/news/5070.

[9] Jacobs, Karla. “Nicaraguan Foreign Policy: The threat of a good example, again?” September 18, 2009. http://www.tortillaconsal.com/nica_foreign_policy.html

[10] CAFTA country mplementation: El Salvador, March 1, 2006; Guatemala, June 1, 2006; Honduras, April 1, 2006; Nicaragua, April 1, 2006; Dominican Republic, March 1, 2007. www.wola.org. Costa Rica is in the final round of CAFTA negotiations in the Legislative Assembly, but stalemates over intellectual property, agriculture (sugar) and telecom privatization have prevented Costa Rica from implementing. The US responded by temporarily banning CR sugar exports from entering US to up the pressure on Costa Rican legislators.

[11] “Central America-Dominican Republic Free Trade Agreement”, Washington Office on Latin America, http://www.wola.org/index.php?&option=com_content&task=blogsection&id=6&Itemid=&topic=Rights+and+Development&sub=1&content_topic=CAFTA. WOLA finds that: “CAFTA is the first “sub-regional” agreement to be negotiated between such unequal trading partners, where the combined GDP of Central America is equal to 0.5 percent of U.S. GDP. Rigorous impact assessments of CAFTA have not been conducted in Central America. Rather, Central Americans are forced to judge the potential impact based upon the ten-year record of NAFTA. Analysts expect that--as occurred in Mexico--CAFTA will attract foreign direct investment and boost Central American exports in certain sectors, but will provide little benefit to the rural and urban poor of the region.”

[12] Rojas-Romagosa, Hugo and Luis Rivera. “Economic Implications of an Association Agreement between the European Union and Central Amerca.” IIDE Discussion Paper 200708-01 200708-01 , October 2007. http://www.i4ide.org/content/wpaper/dp20071001.pdf. The authors conclude: “We find that liberalizing the access to both products [bananas and sugar] will bring significant gains to CA, while excluding them from the negotiations will bring no static gains. If trade facilitation mechanisms are implemented and we allow for the expected increase in FDI inflows to CA, welfare gains improve for all scenarios but are conditions on the level of EU agricultural liberalization.”

[13] Currently, the EU is “the leading donor of official development aid to Central America… with € 840 million set aside.” “Regional Strategy Paper 2007-2013.” European Commission External Relations. http://ec.europa.eu/external_relations/ca/rsp/07_13_en.pdf.

[14] Urgell Garcia, Jordi. “Esquipulas revisited: What can peace negotiation theory and practice learn from Central American peace processes 20 years later?” 2008 IPRA Global Conference, Belgium. http://soc.kuleuven.be. Esquipulas II calls for Central American region-wide free trade in order to strengthen Central America’s trade capacity in the global economy.

[15] Official SICA website: http://www.sica.int/index_en.aspx.

[16] Central American Bank for Economic Integration: http://en.centralamericadata.com/en/topics/go/Central+American+Bank+for+Economic+Integration.

Tara Ruttenberg holds a master's degree in International Peace Studies at the University for Peace in Costa Rica.
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