Towards Sustainable Development in Central America and the Caribbean

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Towards Sustainable Development in Central America and the Caribbean Edited by Anders Danielson and A. Geske Dijkstra

Towards Sustainable Development in Central America and the Caribbean

Also by Anders Danielson THE POLITICAL ECONOMY OF DEVELOPMENT THE ECONOMIC SURPLUS

Also by A. Geske Dijkstra GENDER AND ECONOMICS: A European Perspective

Towards Sustainable Development in Central America and the Caribbean Edited by

Anders Danielson Associate Professor Department of Economics University of Lund Sweden

and

A. Geske Dijkstra Senior Lecturer in Economics Faculty of Social Sciences Erasmus University Rotterdam The Netherlands

Editorial matter, selection and Chapter 1 © Anders Danielson and A. Geske Dijkstra 2001 Chapter 2 © Anders Danielson 2001 Chapter 6 © A. Geske Dijkstra 2001 Chapters 3–5, 7–9 © Palgrave Publishers Ltd 2001 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2001 by PALGRAVE Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N. Y. 10010 Companies and representatives throughout the world PALGRAVE is the new global academic imprint of St. Martin’s Press LLC Scholarly and Reference Division and Palgrave Publishers Ltd (formerly Macmillan Press Ltd). ISBN 0–333–79337–4 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Towards sustainable development in Central America and the Caribbean / edited by Anders Danielson, A. Geske Dijkstra. p. cm. Includes bibliographical references and index. ISBN 0–333–79337–4 1. Sustainable development—Central America. 2. Sustainable development—Central America. I. Danielson, Anders, 1957– II. Dijkstra, A. Geske. HC141.Z9 E58 2001 338.9728’07—dc21 2001032719 10 10

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Printed in Great Britain by Antony Rowe Ltd, Chippenham, Wiltshire

Contents List of Tables

vii

List of Figures

x

Preface

xi

Notes on the Contributors

xii

List of Abbreviations

xiv

1 Towards Sustainability in Central America and the Caribbean: Introduction and Overview A. Geske Dijkstra and Anders Danielson 2

Fiscal Sustainability in the CAC Region Anders Danielson

3 The Fruits of Interest: Financial Liberalization and Banking in Central America Trevor Evans 4 Trade Reform in Central America and the Caribbean: Will Liberalization Resolve the Problem of Structural Imbalances? Rebecca Taylor and Andy Thorpe 5 Economic Reform, Citizenship and Social Integration in Central America Carlos Sojo 6 Crisis, Adjustment and the Dynamics of Gender Relations in Central America and the Caribbean A. Geske Dijkstra 7

Economic Policy and the Environment: Structural Adjustment and Prospects for Sustainable Natural Resource Management in Central America Ruerd Ruben

v

1 12 30

57

88

114

140

vi Contents

8 Sustained Growth in Haiti: Pipe-Dream or Realistic Possibility? Mats Lundahl 9

The Performance of the Manufacturing Industry under Adjustment: The Case of Trinidad & Tobago Philomen Harrison

Index

161

192

221

List of Tables 1.1 1.2 1.3 2.1 2.2 2.3 2.4 2.5 2.6 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8

Growth and fluctuations of income Indicators of economic well-being Agricultural production and export, index Macroeconomic indicators for Central American countries, annual averages Macroeconomic indicators for Caribbean countries, annual averages Fiscal sustainability indicators for Central American countries, annual averages, per cent of GDP Fiscal sustainability indicators for Caribbean countries, annual averages, per cent of GDP Debt indicators: Central America Debt indicators: Caribbean Indicators of financial institutions in Central America, 1995 Liberalization of interest rates Real rates of interest in Central America, 1990–96 Reserve requirements on current accounts in national currency Bank interest-rate spreads in Central America, 1990–96 Liquidity (M2) as percentage of GDP Gross saving as percentage of GDP Gross investment in fixed capital as percentage of GDP Credit extended by banks in Central America, 1990–95 Commencement of trade liberalization reforms in Central America and the Caribbean Exchange rate controls and restrictions in Central America and the Caribbean, 1979 and 1995 Tariffs and non-tariff restrictions in Central America and the Caribbean, 1995 Pre- and post-trade reform performance of the Central American and Caribbean economies Structure of Costa Rican exports, 1970–96 Structure of Guatemalan exports, 1970–96 Structure of Jamaican exports, 1970–95 Intra-regional exports as per cent of total exports, 1985–95 vii

3 4 5 18 19 22 23 25 26 37 40 41 42 43 45 46 48 49 62 64 67 72 74 76 79 80

viii List of Tables

5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 7.1 7.2 7.3 7.4 7.5 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8

Costa Rica: GDP composition by sector, constant prices Honduras: GDP composition by sector, constant prices Nicaragua: GDP composition by sector, constant prices Central America: poverty and levels of vulnerability Economically active population (EAP) by sector Employment by sector Percentage growth of average monthly income by sector Levels of inclusion–exclusion based on type of employment Structure of inclusion–exclusion, per cent of economically active population General indicators, Central America and the Caribbean Urbanization, contraceptive use and fertility indicators Female share in parliament Social indicators: relative female/male achievements Maternal mortality rates Relative female/male economic activity rate and occupational segregation index Improvements in indicators between 1980 and 1990, by country Relative female/male hourly wages in urban formal and urban informal sector, Central America Central America: degradation of natural resources Agrarian structure, land resources and agricultural yields Relative price changes 1980–90 Economic policies and environmental effects Simulated farm household responses to policy instruments Selected adjustment policies as they impact on private investment Selected relative prices, period averages, 1966–98 Growth rates, period averages Savings and investment as per cent of GDP Debt ratios, monetary variables, fiscal and current account deficits Industry contribution to GDP Selected indicators: food processing/drink/tobacco industry Selected indicators: textiles, garments and related industry

91 92 93 96 99 102 103 105 106 118 121 122 123 124 125 129 131 143 145 147 150 153 197 202 204 205 206 207 208 209

List of Tables ix

9.9 Selected indicators: assembly and related industry 9.10 Real lending rate, real exchange rate index, and changes in the real exchange rate, 1983–94 9.11 Profit to sales and investment to total assets by employment size and industry

209 210 214

List of Figures 4.1 4.2 4.3 5.1 6.1 9.1 9.2

Trade balance, Costa Rica Trade balance, Guatemala Trade balance, Jamaica Exclusion and poverty Relations between variables Bilateral real exchange rate with the US Real lending and deposit rates and the rate of inflation

x

73 77 78 98 115 202 203

Preface Like many other books, this one has a long history. In 1997, we coordinated a panel with the same title as this book at a conference of ASERCCA (Association of European Research on the Caribbean and Central America) in Portsmouth, UK. At the time, we were concerned about whether the economic growth that seemed to have returned to most countries of the region, was sustainable. The concern not only involved environmental sustainability, but also social, and even economic, sustainability. We thought it was too early for concluding that the wonderful results of the neoliberal reforms were just around the corner. From the discussions during that conference, it was clear that the topic of sustainable development would remain a critical issue for the region for some time to come. Subsequent developments have only confirmed the continuing socio-economic vulnerability of the region. Several chapters in this book were presented as first drafts during the ASERCCA conference. Subsequently, we have also approached other authors to write papers on specific topics, with a view to complementing the central themes of the book. We think this has resulted in a comprehensive book, including general papers that cover the main aspects of sustainability for the whole region, as well as some country case studies. Although approaches and detailed conclusions may differ, all authors share a critical stand towards neoliberal reforms. At the same time they examine the effects of these reforms empirically without prejudicing any outcomes. We hope this book contributes to the discussion on sustainable development and to a critical reflection on the merits of the neoliberal reforms carried out in the last decade of the twentieth century. ANDERS DANIELSON A. GESKE DIJKSTRA

xi

Notes on the Contributors Anders Danielson is Associate Professor in Economics at the University of Lund, Sweden. He is the author of The Political Economy of Development (1993) and The Economic Surplus (1994) as well as numerous articles on development issues in professional journals, including Economic Development and Cultural Change, Social and Economic Studies and African Development Review. A. Geske Dijkstra is Senior Lecturer in Economics in the Program of Public Administration, Faculty of Social Sciences of Erasmus University Rotterdam. She has worked before at the Faculty of Economics of Maastricht University and at the Institute of Social Studies. She has published Industrialization in Sandinista Nicaragua: Policy and Practice in a Mixed Economy (1992) and Gender and Economics: A European Perspective (1997, with Janneke Plantenga), as well as articles in professional journals such as World Development and Development and Change. Trevor Evans teaches economics at the University of Applied Sciences, Berlin. He worked for many years at CRIES (Coordinadora Regional de Investigaciones Económicas y Sociales) in Managua, Nicaragua. His writings on Central America include La Transformation Neoliberal del Sector Público en Centro América y el Caribe (1995), and Liberalización financiera y capital bancario en América Central (1998). Philomen Harrison is Deputy Program Manager at the Caribbean Community Secretariat (CARICOM) in Georgetown, Guyana. She obtained her PhD in development studies with the Institute of Social Studies in the Hague, on ‘The Firm under Adjustment: A Micro-level Interpretation of the Impact of Macroeconomic Policies in Trinidad and Tobago, 1983–94’. Her current research interests include trade and development issues in the Caribbean region. Mats Lundahl is Professor of Development Economics at the Stockholm School of Economics. He has published some twenty books on development issues, including Peasants and Poverty (1979), Politics or Markets? (1992) and Peasants and Religion (2000, with Jan Lundius), and numerous articles in professional journals, including the American Economic Review, Journal of Development Economics and World Development. xii

Notes on the Contributors xiii

Ruerd Ruben is Associate Professor in the Development Economics Group at Wageningen Agricultural University, the Netherlands. He is author of Making Cooperatives Work (FORIS/CEDLA, 1999) as well as of many articles in academic journals, and he is co-editor of several books on agriculture in Central America, such as Sustainable Agriculture in Central America (1997, with Jan de Groot), Agrarian Policies in Central America (1998, with Wim Pelupessy) and Rural Development in Central America: Markets, Livelihoods and Local Governance (1999, with Johan Bastiaensen). Carlos Sojo has been affiliated with FLACSO (Facultad Latinoamericana de Ciencias Sociales) in Costa Rica since 1989, where he is now Director. He holds a PhD in Social Sciences with the University of Utrecht, the Netherlands. His publications include Los de en Medio, La nueva pobreza en Centroamérica (1997, San José, FLACSO) and Reforma Económica, Estado y Sociedad en Centroamérica (1998, San José, FLACSO). Working on issues of social exclusion, he recently edited with Estanislao Gacitúa and Shelton H. Davis Exclusión Social y Reducción de la Pobreza en América Latina y el Caribe (2000, San José, Banco MundialFLACSO). Rebecca Taylor is a Senior Lecturer in Economics at the University of Portsmouth, UK. Her research focuses on trade and development issues with specific reference to West Africa, Canada, the UK, Central America and the Caribbean. She has recently completed her PhD: ‘British Trade Relations with West Africa during the Colonial Period’. Andy Thorpe, a Principal Lecturer in Economics at the University of Portsmouth (UK), holds a PhD in Economics awarded by the Institute of Latin American Studies, University of London. His recent publications include papers in World Development, Energy and Development and International Journal of Social Economics.

List of Abbreviations ACP AVANSCO

CA CAC CACM CAEM CARICOM CAT CET CBI CENITEC CEPAL CET CETRAS CINDE CMCA CONAPEX DAC ECLAC EDC ESAF FAO FIDE FLACSO

Africa, Caribbean, Pacific Asociación para el Avance de las Ciencias Sociales en Guatemala, Association for Promotion of the Social Sciences in Guatemala Central America Central America and the Caribbean Central American Common Market Cámara Empresarial de Guatemala, Chamber of Commerce of Guatemala Caribbean Common Market Certificado de Abono Tributario, Tax Benefit Certificate Common External Tariff Caribbean Basin Initiative Centro de Investigaciones Tecnológicas y Científicas, Centre for Technological and Scientific Research Comisión Económica para América Latina y El Caribe (see ECLAC) Common External Tariff Certificados Transferibles con Opción a Divisas, Transferrable Certificates with Option for Foreign Exchange Coalición Costarricense para Iniciativas de Desarrollo, Costarican Coalition for Development Initiatives Consejo Monetario Centroamericano, Central American Monetary Council Consejo Nacional de Promoción de Exportaciones, National Council for Export Promotion Development Assistance Committee Economic Commission for Latin America and the Caribbean Export Development Company Enhanced Structural Adjustment Facility Food and Agriculture Organization Fundación para la Inversión y el Desarrollo, Foundation for Investment and Development Facultad Latinoamericana de Ciencias Sociales, Latin American Faculty of Social Sciences xiv

List of Abbreviations xv

FUSADES

Fundación Salvadoreña para el Desarrollo Económico y Social, Salvadorean Foundation for Economic and Social Development GATT General Agreement on Tariffs and Trade GDF Global Development Finance GDP Gross Domestic Product GNP Gross National Product GEXPRONT Gremial de Exportadores No Tradicionales, NonTraditional Export Union HDI Human Development Index HIPC Highly Indebted Poor Countries IADB Interamerican Development Bank IDC Industrial Development Corporation IFS International Financial Statistics IICA Instituto Interamericano para la Cooperación Agraria, Inter-American Institute for Agricultural Cooperation IIED International Institute for Environment and Development IMF International Monetary Fund ISI Import Substituting Industrialization IUCN International Union for Conservation of Nature and Natural Resources LAC Latin America and the Caribbean NAFTA North American Free Trade Association NEM New Economic Model NTB Non-Tariff Barrier NTR New Trade Regimes OECD Organization for Economic Cooperation and Development PNP People’s National Party PPP Purchasing Power Parity SAF Structural Adjustment Facility TIDE Trends in Developing Economies UNDP United Nations’ Development Programme USAID US Agency for International Development VAT Value Added Tax WISTAT Women’s Indicators and Statistics Database XLG Export-led growth

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1 Towards Sustainability in Central America and the Caribbean: Introduction and Overview A. Geske Dijkstra and Anders Danielson

Introduction Central America and the Caribbean (henceforth the CAC region) is characterized by diversity.1 Per capita incomes range from about US$ 300 in Haiti to almost US$ 6,500 in Barbados; in the global Human Development Index (HDI) ranking, Barbados and Antigua and Barbuda rank among the 30 highest, while Haiti, Nicaragua and Honduras dwell towards the bottom of the list. Other indicators, economic as well as social, basically follow these patterns. A natural question, then, would be: how can we justify the grouping together of such dissimilar countries? One answer would be that while these countries are indeed different, they also have many features in common. For one thing, they are all geographically close to a major market – North America – and policies in the giant neighbour, therefore, may be expected to influence development patterns in all countries in the CAC region. Second, the countries are all relatively small: the most populous – Guatemala – hosts about 10 million people and the economically dominant country – also Guatemala – has a GDP less than that of Birmingham, UK, a city with a population of about 900,000. The smallness of the countries in the CAC region also defines the next of their common characteristics: the relatively narrow resource base. All countries – Trinidad and Tobago excepted – import over twothirds of their energy from abroad. All countries with significant forested areas display deforestation rates which are high in a global perspective – over 2 per cent per annum for all the Central American countries and even higher numbers for some of the islands (FAO, 1999).2 This makes them increasingly vulnerable to the effects of natural disasters such as floods and hurricanes. Most of the countries, in 1

2 Introduction and Overview

addition, display relatively high population-to-arable-land ratios, implying that the pressure on natural resources is significant. Since virtually none of the countries has developed a large and growing industrial base, it means that the scope for internal adjustment, as a response to growing population pressure, is rather small. The point we wish to bring home is that while there are reasons to treat the countries in the CAC region in one study with a common theme, it is extremely difficult to generalize over the entire region; this is one reason for including country studies in the book. The similarities of the countries – probably best captured by reference to their weak resource base, their size and their proximity to a large market – should never be allowed to cloud the fact that the CAC region contains a wide variety of development strategies and development experiences. That they have common issues to face – in particular, the problem of finding a sustainable development strategy – does not imply that there is an optimal CAC strategy for sustainable development. To a very large extent, the problems are country-specific, and so will the solutions have to be. The individual chapters in this book reflect that diversity. Some data may serve to illustrate the issues facing the CAC region and addressed in this book. Consider first Table 1.1 which shows calculations of GDP growth between 1980 and 1997, divided into two subperiods, the 1980s and the 1990s, for some of the larger economies in the region. For the entire period, annual growth ranges from minus 1.2 per cent in Haiti to over 3 per cent in the Dominican Republic. It deserves to be pointed out, however, that growth in Table 1.1 is measured in current dollars, so that local-currency growth is higher for those countries experiencing devaluations during the period – and all countries in Table 1.1 have devalued, the average annual rate of change of the exchange rate being 63 per cent in the 1980–96 period. In terms of local currencies, growth rates are thus higher. Most countries in the sample picked up in the 1990s: only growth in Haiti and Jamaica is lower in the 1990s than in the 1980s. While several commentators have taken this as evidence in favour of reform success (IDB, 1995; Easterly, Loayza and Montiel, 1997), it deserves to be noted that the volatility of growth does not seem to have decreased as growth rates have increased. Indeed, for five of the nine countries fluctuations of the growth rate is higher in the 1990s than in the 1980s. Volatility of growth is also higher in the CAC region than in developed economies, exemplified in Table 1.1 by the US and the OECD. The increased volatility raises questions regarding the viability of current growth paths in the region. First, an established literature has

A. Geske Dijkstra and Anders Danielson 3 Table 1.1 Growth and fluctuations of income 1980–97

Costa Rica Dom. Republic El Salvador Guatemala Haiti Honduras Jamaica Nicaragua Trinidad & Tobago US OECD a b

1980–89

1990–97

Growtha

Volatilityb

Growtha

Volatilityb

Growtha Volatilityb

3.08 3.30 1.14 2.13 1.20 2.74 1.50 0.09 0.00

4.74 3.66 5.84 3.87 5.17 3.61 4.72 7.19 3.92

2.26 3.16 2.00 0.77 0.38 2.46 1.63 1.99 0.99

5.67 3.14 5.56 2.95 3.02 2.93 5.92 5.78 4.73

4.27 3.51 5.62 4.07 3.45 3.14 1.32 3.05 1.43

2.98 4.58 2.12 4.39 6.90 4.64 2.59 8.38 1.85

2.11 2.37

2.06 1.30

2.25 2.67

2.45 1.54

1.91 1.94

1.50 0.78

Average annual growth of GDP. Standard deviation of GDP growth rate.

Source: Calculations from World Bank (1999).

found a close relation between growth volatility and inflation variability, possibly with the causality running from the former to the latter. Second, fluctuations in the rate of growth make planning difficult and since many of the economies in the CAC region are dependent on foreign aid inflows, efficient use of these resources will become more difficult for a given absorption capacity. Third, to the extent that increased volatility can be taken to mean increased uncertainty, a reasonable assertion would be that increased fluctuations in the GDP growth rate decreases private investments. Finally, the increased volatility suggests that most of the countries are still highly dependent on earnings from one or a few primary exports, the prices of which display wide fluctuations. This means that these small economies are not sufficiently diversified to be able to shape their own destiny. However, volatility in the rate of growth is but one aspect of economic sustainability; another is which development strategy the government chooses – manifested in the extent to which the majority of the population benefits from the fruits of growth. Table 1.2 provides a few indicators of economic well-being and from this it clearly emerges that well-being in the region does not necessarily depend on economic growth alone: conscious decisions by the government matter as well.

4 Introduction and Overview Table 1.2 Indicators of economic well-being

Costa Rica Dom. Republic El Salvador Guatemala Haiti Honduras Jamaica Nicaragua Trinidad& Tobago

Incomea

Ginib

Povertyc

Educationd

Healthe

2,640 1,600 1,700 1,470 310 660 1,600 380 3,870

47.0 50.5 49.9 59.6 n.a. 53.7 41.1 50.3 41.7

18.9 19.9 48.3 53.3 48.8 46.9 4.3 43.8 32.2

92 81 79 78 n.a. 90 100 83 88

214 71 74 33 8 34 91 34 151

a

1997 GDP per capita in current US$. Gini index for income, most recent estimate. The index runs from 0 to 100 with a higher value indicating higher inequality; industrial countries normally have Gini indices between 25 and 40. c Percentage of population living on less than 1$ a day for all countries except El Salvador, Haiti and Trinidad and Tobago where the measure is the percentage of the population below the national poverty line; most recent estimates. d Net primary enrolment 1995, in per cent of relevant cohort. e Health expenditure per capita, in US$; average 1990–95. b

Sources: World Bank (1999); UNDP (1998); Deininger and Squire (1996).

As noted above, income per capita differs significantly in the sample: from Haiti’s US$310 to Trinidad’s US$3,870. The distribution of income varies also between countries, and this does not appear to be related to the level of income. Thus Jamaica, one of the middle-income countries in the sample, has a Gini index which resembles that of industrialized countries (it is virtually the same as that for the US), while some countries in Central America – Guatemala and El Salvador – have virtually the same per capita income but significantly higher income inequality. However, there is a strong relation between access to social services (such as basic education or health facilities) and income equality and, on a broader front, between income equality and poverty eradication (Deininger and Squire, 1996). The three countries in the sample with the most equal distribution of income are also the three countries with the smallest fraction of the population under the absolute poverty line, the highest net enrolment in primary school, and the largest health expenditure per capita. It would seem a reasonable hypothesis that development paths which entail higher growth of GDP are viable, or sustainable, only if they benefit a majority of the population; this would imply that it is

A. Geske Dijkstra and Anders Danielson 5

possible to assess economic sustainability by examining how social indicators change. Most of the larger countries in the CAC region, with the possible exception of Trinidad and Tobago, rely heavily on agriculture – for income, forex and employment. Consequently, the impact of economic reforms on the agricultural sector will be important for the sustainability of a market-oriented development path. Table 1.3 provides some indicators of how agricultural production and exports have fared in the past two decades. In six out of nine countries, per capita output of agricultural products fell between 1980 and 1997. In some countries, such as the Dominican Republic, the decline is modest – less than one per cent per annum. In other countries, Haiti and Honduras, the contraction is almost 2 per cent per annum. Consequently, per capita output in 1997 in these two countries was only three-quarters of their 1980 levels. The failure to reach or maintain adequate production levels in agriculture has also had severe repercussions on exports. As Table 1.3 shows, the volume of agricultural exports has declined drastically in these countries: by 30 per cent in the Dominican Republic, by half in Honduras, and by a staggering 70 per cent in Haiti. However, while things appear brighter in some of the other countries, there are reasons to be sceptical as to the sustainability of the situation. Per capita agricultural production in Costa Rica, Guatemala

Table 1.3 Agricultural production and export, index (1990100) Per capita production

Costa Rica Dom. Republic El Salvador Guatemala Haiti Honduras Jamaica Nicaragua Trinidad & Tobago Source: FAO (1999).

Export volume

Export unit value

1980

1997

1980

1997

1980

1997

96 108 100 92 124 123 92 126 114

107 94 93 101 86 89 107 96 91

65 141 142 103 284 120 74 112 69

145 98 195 204 84 64 127 146 127

9 127 104 183 126 140 79 78 126

100 121 114 105 90 103 113 107 103

6 Introduction and Overview

and Jamaica has increased since 1980, but so have agricultural exports, and the growth rate of agricultural exports has been higher than that for per capita production. This suggests that the economic reforms have brought about a structural change within agriculture – from food to exportables, such as cut flowers, fruits, sugar and coffee. Is this a sustainable development path? Arthur Lewis (1944, 1950) argued long ago that the proper development path for small Caribbean states was rapid industrialization, mainly because the scarce land could not accommodate a growing population employed in agriculture. Small, densely populated economies, in other words, should rely on imports for necessary foodstuffs. When the development strategy emphasizes exports of other agricultural commodities, rather than industrial goods, to pay for imported food, however, the risk is that exporters face a secular deterioration in the terms of trade. Table 1.3 shows that the export unit values for five of the nine countries fell between 1980 and 1997. In one case – Guatemala – the rapid increase in exported volume has been barely enough to balance the drastic fall in export prices. On the basis of these brief observations, we conclude that it is too early for cheers, that the improved growth record in the 1990s cannot be taken as evidence that countries are now on a sustainable development path. As discussed below, sustainability is a complex and rather elusive concept and it has many dimensions. Even if we limit our discussion to economic aspects, it is clear that growth alone is insufficient for sustainability: as we argue above, popular participation and a broad and reasonable distribution of public services are likely to be preconditions for a sustainable development path.

Sustainability The very term ‘sustainable development’ is rather vague, and as noted by Blaikie (1991) shares characteristics with terms like ‘freedom’ or ‘democracy’. First, all of them are multi-faceted which means, inter alia, that it is difficult to measure them quantitatively. Second, none of the concepts defines an end-state: countries, or groups of people, do not ‘accomplish’ democracy, freedom or sustainable development. As liberal democracy spread in Europe in the nineteenth century, the concept was gradually redefined and increasingly took on meanings that were not used (or implied) earlier on. Third, working towards increased democracy, freedom, or sustainable development implies costs and trade-offs between different sub-objectives and various groups of people.

A. Geske Dijkstra and Anders Danielson 7

Improving the prospects for sustainable development in small-scale agriculture, for instance, may imply deteriorating conditions for plantations, manufacturing, or wildlife.3 Finally, all of these concepts invite different interpretations of their meaning, implying that it is difficult to find a commonly accepted – let alone operational – definition. Even though the meaning of sustainability is difficult to pin down precisely, most definitions have common elements. Synonyms for ‘sustainable’ offered by the Merriam-Webster’s Thesaurus include ‘bearable’, ‘livable’ and ‘tolerable’. According to the Merriam-Webster’s Dictionary, sustainable can be interpreted to mean ‘of, relating to, or being a method of harvesting or using a resource so that the resource is not depleted or permanently damaged’. In the social sciences, it seems possible to distinguish between three groups of definitions. Environmental sustainability tries to capture the impact of environmental change on the behaviour of eco-systems. Sometimes, the concept of ‘resilience’ is used to analyze the ability of an agro-system to return to its original pattern of behaviour following an external shock (Pearce et al., 1989). Social sustainability is usually used to refer to specific situations. There are a multitude of social characteristics which are specifically related to sustainability for each set of technical and economic decisions. The focus of social sustainability analyses may thus range from whether it is possible to maintain the current distribution of income (between classes, sexes or generations) to issues of political influence and the legitimacy and representativeness of those holding political power. Economic sustainability, finally, is a concept with wide applications – and many definitions: Pezzey (1989) identifies over sixty, and the Development Watch Initiative adds even more.4 One of the major reasons for this is that the inherently dynamic and multi-faceted nature of the term stimulate stakeholders to provide their own interpretations, so ‘self-interest compounds academic confusion’ (Blaikie, 1991: 2). Due to the lack of precise and generally agreed definitions, the three categories of sustainability are also necessarily overlapping. While the individual chapters in this book take different views of sustainability (and no one attempts a fully-fledged treatment of a country’s economic sustainability), most take as their point of departure the market-oriented reforms that have characterized the region for at least 15 years. There are dimensions involved when one analyzes the relation between sustainability and economic reforms. First, were reforms necessary, i.e., was the country, prior to reforms, on an unsustainable growth or development path? This amounts to investigating the long-run necessity of reforms.

8 Introduction and Overview

Second, were the implemented reforms optimal from a sustainability point of view? While the answer to this question clearly depends on how the sustainability concept has been operationalized, the analysis may highlight the critical element in a reform process. One example is that of the government’s fiscal situation. Many countries found themselves prior to reform in a fiscally unsustainable situation, and economic reforms addressed this problem by emphasizing a more rational tax system and a streamlined expenditure pattern. However, the available data suggest that the major factor causing fiscal unsustainability in the CAC region is the existence of large external debts. Consequently, an alternative (from a strict sustainability point of view) to fullyfledged fiscal reforms may be heavy debt relief. As the costs and benefits of these two strategies for addressing the fiscal problems are differently distributed, the choice boils down to weighing the importance of different groups (such as, say, domestic tax payers or domestic recipients of subsidies to foreign banks) in the development strategy envisaged by the government. Third, how do the implemented reforms interact with other phenomena in society? How do, say, agricultural reforms impact on the economy’s environmental sustainability? What is the impact on social stability of improved schooling opportunities for girls? When economic reforms are perceived as being implemented from abroad without any dialogue with domestic grass-roots, how does the low political legitimacy of reforms affect popular participation in the political process and popular support for policy measures?

Overview The chapters in this book fall naturally into two parts, one dealing with comparative analyses of two or more countries in the region and one dealing with country studies. The latter comprises only two studies, but in a sense it covers the entire region dealing as it does with the relatively wealthy Trinidad and Tobago and the destitute Haiti. Chapter 2, by Anders Danielson, asks whether market-oriented reform programmes have succeeded in bringing fiscal sustainability into reforming countries. In this chapter, a formal, and empirically meaningful, definition of fiscal sustainability is developed and used to assess progress in fiscal reform. The major finding in the chapter is that high interest rates, continuing exchange rate adjustments and large external debts make the attainment of a sustainable fiscal position unlikely in most of the CAC countries.

A. Geske Dijkstra and Anders Danielson 9

In Chapter 3, Trevor Evans analyses in detail the financial liberalization and banking reforms carried out in six Central American countries as of 1990. The liberalizations have led to high real lending rates, as well as to large spreads. Banking reform brought renewed control of this highly profitable sector by some powerful economic groups. Savings have not increased, while the high lending rates led to a shift in the allocation of credits, from productive sectors to commerce. Access of small and medium producers to credit has been reduced. These developments bring about increased social differentiation and may harm long-term growth prospects. Trade liberalization has been a central aspect of reform policies in Central America and the Caribbean. Rebecca Taylor and Andy Thorpe describe in Chapter 4 the exchange rate policies, trade liberalization and export promotion policies that have been carried out in the region and analyze their results. It shows that export diversification is still limited, and that all countries still suffer from large trade deficits. They are dependent on income flows from services, in particular tourism, on external private flows and/or on external aid. As a result, external vulnerability of the region did not diminish. Carlos Sojo examines in Chapter 5 the impact of economic reform on social integration in Central America. He looks at levels of poverty according to poverty line and basic needs definitions and examines potential integration of the poor via the labour market. The two approaches are combined to show what kind of employment is most likely to decrease poverty and vulnerability. It focuses, in particular, on Costa Rica, Honduras and Nicaragua and reveals and interprets interesting differences and similarities in levels of social integration and social exclusion in the three countries. The crisis and adjustment policies implemented in the CAC region in the 1980s and 1990s have had significant impact on gender relations. In Chapter 6, A. Geske Dijkstra examines changes in gender inequality in the region, in particular between 1980 and 1990. She looks at indicators of cultural inequality, inequality in power, and inequality in access to social and economic assets. Although some indicators deteriorated and some relation with crisis and stabilization can be established, overall gender equality improved in this period. Improvements are stronger in countries with favourable public policies and with strong women’s movements. During the past decades, environmental degradation and depletion of natural resources has increased in Central America. In Chapter 7, Ruerd Ruben analyzes the impact of monetary and fiscal reforms, as

10

Introduction and Overview

well as of reduced levels of public investment on these processes. It presents a bio-economic modelling framework in order to analyze the impact of alternative policy instruments at the farm household level. It concludes that specific subsidies and targeted price interventions are required to overcome market failures in this area. In Chapter 8, Mats Lundahl examines the causes of the fragility of the Haitian economy. These mainly lie in an insufficient natural resource base, with a growing population pressing on a shrinking land area. The chapter also investigates employment and growth opportunities in other sectors, such as manufacturing industry, handicrafts and tourism, and assesses the situation with respect to two key inputs of the development process, namely education and infrastructure. A conclusion follows on the overall possibility of increased growth in Haiti. One basic premise for orthodox adjustment policies is that economic liberalization leads to increased private investments. In Chapter 9, Philomen Harrison analyzes the reform policies of Trinidad and Tobago, especially since 1989, in an attempt to examine this premise. She presents the results of an econometric study of private sector responses in the manufacturing sector. This shows that overall levels of private sector investment in industry are limited, but the study reveals and interprets some interesting sectoral differences.

Notes 1. We follow convention and include in Central America the five countries that are bordered by Mexico in the north and Panama in the south: Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua. Trinidad and Tobago is classified as a Caribbean country. All data in this section come, unless otherwise stated, from the Human Development Report, 1998 (UNDP, 1998). 2. Such as Jamaica at over 7 per cent per annum and Haiti at 3.4 per cent per annum (data are 1990–95 averages; FAO, 1999). 3. O’Riordan (1990) tells the story of wildlife conservation in parts of Africa. The trade-off was between competing uses of the habitat of rare species of birds. The solution advocated by the IUCN – the World Conservation Union – involved the eviction of farmers from grazing lands in the national parks. Here, the sustainability of a diverse fauna was perceived as in conflict with the way of life of farmers and pastoralists. 4. A list of the indicators proposed by the Development Initiative may be found at the UNDP Internet site: http://www.undp.org/devwatch/ indtempl.htm.

A. Geske Dijkstra and Anders Danielson 11

References Blaikie, P. (1991) ‘Is the Concept of “Sustainable Development” Sustainable?’, Trondheim: Association of Norwegian Geographers, mimeo. Deininger, K. and L. Squire (1996) ‘A New Data Set Measuring Income Inequality’, World Bank Economic Review, vol. 10. Easterly, W., N. Loayza and P. Montiel (1997) ‘Has Latin America’s Post-Reform Growth Been Disappointing?’, Journal of International Economics, vol. 43. FAO (1999) FAOSTAT, 1998 on CD-ROM, Rome, Food and Agriculture Organization. IDB (1995) Economic and Social Progress in Latin America, 1995 Report: Overcoming Volatility. Washington/Baltimore: Inter-American Development Bank and Johns Hopkins University Press. Lewis, W. A. (1944) ‘An Economic Plan for Jamaica’, Agenda, vol. 3. Lewis, W. A. (1950) ‘The Industrialisation of the British West Indies’, Caribbean Economic Review, vol. 2. O’Riordan, T. (1990) ‘Sustainable Agriculture: Implications for Africa’, paper presented at the Social Science Research Council conference on sustainable agriculture, Harare. O’Riordan, T. (1998) ‘The Politics of Sustainability’, in R. K. Turner (ed.), Sustainable Environmental Management: Principles and Practice, London: Belhaven Press. Pearce, D., A. Markandya and E. Barbier (1989) Blueprint for a Green Economy, London: Earthscan. Pezzey, J. (1989) Definitions of Sustainability, Working Paper No. 9, London: UK Centre for Environment and Development. UNDP (1998) Human Development Report, 1998, New York, NY: United Nations’ Development Programme. World Bank (1999) World Development Indicators, 1999, Washington, DC: World Bank.

2 Fiscal Sustainability in the CAC Region Anders Danielson

Introduction For several years, most countries in the Caribbean and Central America (CAC) have been pursuing similar and far-reaching economic reforms. This is nothing peculiar for that region: most countries in Latin America, Africa and parts of Asia have been engaged in similar economic strategies. The background is a dismal performance, particularly with regard to economic growth, since the mid-1970s. Moreover, following the debt crisis of the early 1980s and the increasingly important role of international financial institutions, particularly the International Monetary Fund (IMF) and the World Bank, economic reforms have come to mean a move towards a more dominating role for market forces at the expense of the government. Essentially, economic reforms in this chapter will mean an economic strategy based on three pillars: macroeconomic stabilization, a reduced role of the public sector in economic life, and an attempt to shift resources from ‘non-tradables’ to ‘tradables’ production. Even though reform programmes under IMF–World Bank auspices may be different in different countries, the typical reform programme contains these three pillars and, indeed, most policies included in the programmes may be classified under one of these headings. To say that most countries have agreed to initiate reforms, however, does not mean that reforms have been carried through painlessly, let alone that they are likely to sustain in the long run. Quite the contrary, as this chapter will argue, reforms in the CAC region are often not sustainable, mainly because of two factors. First, reform design has seldom paid sufficient attention to sequencing, i.e., to the proper order and speed of individual reform components. As is clear from the 12

Anders Danielson 13

voluminous literature on the subject (cf. McKinnon, 1991; Funke, 1993), privatization, deregulation and politically induced intersectoral resource movements are more likely to be successful if carried through in a macroeconomically stable environment. Consequently, macroeconomic stabilization should precede other reforms. In the CAC region (as in other regions) this has seldom been the case: in the typical reform process, things are implemented regardless of what has been done earlier on. Such a strategy does not only increase the risk of reform failure, but may also lead to losses of welfare as it is likely that a failed reform is more costly, in terms of social welfare, than no reform at all (Rodrik, 1989). The second reason why reforms may not be sustainable is because it is very difficult, in several countries in the CAC region, to attain macroeconomic stability without drastic reductions in external debt. The reason for this is that the debt is mostly public or publicly guaranteed so the existence of a debt carries with it demands for tax revenue. Consequently, countries with large external debts are less likely to attain self-sustained growth for at least one of two reasons. First, debtridden countries will either have higher tax burdens or lower levels of public expenditures than countries with low levels of debt. High tax burdens diminish incentives for private investments and thus may hamper growth. Moreover, as public investments are likely to ‘crowd in’ private investments (Taylor, 1994), the rate of growth in debt-ridden economies may suffer even if the debt is serviced not through higher taxes but through cuts in normal expenditures. The second reason is that, ceteris paribus, the fiscal gap will be larger in debt-ridden economies. As low-income countries typically have non-diversified financial markets, the government has to resort to the printing press for covering the gap. This, in turn, leads to higher inflation and, thus, a less stable macroeconomy.1 The purpose of this chapter is to examine fiscal policies in some countries in the region (the choice of countries is dictated by data availability) in the light of economic reforms. The basic question asked is: are fiscal policies sustainable in the sense defined below? The basic answer is ‘no, not without substantial reductions in external debt, or substantial increases in foreign grants, or both’. The structure of the chapter is as follows. Section 2 looks into the budget constraint of the government and defines in a rather precise manner ‘fiscal sustainability’. Section 3 surveys the available data for some countries in the CAC region, and Section 4 concludes.

14

Fiscal Sustainability in the CAC Region

The limits to fiscal policies In principle, a government has three broad options for financing a budget deficit: borrowing from domestic agents, borrowing from abroad and borrowing from the Central Bank. In practice, the government is limited by the extent to which financial markets exist. Typically, in low-income economies – and the CAC region is no exception – domestic financial markets are rather undiversified, so the government is further limited in its financing options. Abstracting from non-tax revenue, the government’s income consists of taxes, T, and foreign grants, A. Expenditures are ‘normal’ current expenditures, G, and interest payments on domestic and foreign debt, D and eF, respectively, where e is the current exchange rate. Assuming that the average interest rates are id and if, respectively, the government’s budget constraint may be written as . . . MDe FGidDif FTA (2.1) where a dot denotes a time derivative. The right-hand side shows expenditures and incomes; the left-hand side how this is financed. If this is rewritten in real terms and as the behaviour of stocks and flows over time, we get . . . M ᎏᎏ d␾f g␶a(id␲n)d(if␲n)f␾ Py

(2.2)

where lower-case letters denote upper-case quantities as share of nominal output, Py, and where n is the rate of growth of nominal output and ␾ is the real exchange rate. M/Py is seignorage. To see the relation between the budget position and the evolution of the total public debt define the total debt as a fraction of nominal output as ⌬ ⬅ b␾f and note that (f␾) ⬵ ␾f ␾ˆ f␾ where ␾ˆ is the rate of change of the real exchange rate (␾ˆ90 is a depreciation). Now, equation (2.2) may be rewritten as ⌬(␳n)⌬(if ␾ˆ␳)f␾␴g␶a

(2.3)

where ␳ is the real domestic interest rate and ␴ denotes seigniorage. Finally, define the primary deficit as d ⬅ g␶ to get ⌬(␳n)⌬(if ␾ˆ␳)f␾d␴a

(2.4)

That is to say, any difference between the primary deficit plus interest payments on the existing debt on the one hand and seigniorage revenue

Anders Danielson 15

and foreign aid on the other must be financed by either foreign or domestic borrowing.2 However, there are limits to the amount of borrowing a country will have access to. In particular, economists usually invoke the no Ponzi game condition to ensure that a country cannot pay the interest on its outstanding debt indefinitely simply by borrowing more.3 Although sometimes used as a criterion for budget sustainability, it is clearly a weak criterion for evaluating fiscal policies since several alternative policy mixes may be consistent with such a criterion even though all of them may not be sustainable in the long run (Buiter, 1985).4 For the present purpose, a more appropriate definition of sustainabil· ity is that of a constant, or falling, debt ratio, i.e. ⌬-0. It is somewhat stricter than the no Ponzi game condition but it allows for a fairly simply evaluation of what is necessary to render budget policies sustainable in the long run. Before turning to countries in the CAC region, however, it is instructive to comment on current reform programmes in the light of equation (2.4). As noted above, reform programmes in the CAC regions have fairly standard components most of which aim at increasing the longrun rate of growth of the economy. However, in the light of the previous discussion, it should be clear that reforms might actually render budget sustainability more difficult to attain. The reason is that actual reform programmes seldom follow the sequencing procedure advocated in the literature. Instead, reforms are implemented as soon as possible. There are at least three reasons why such an implementation procedure may jeopardize the fiscal position. First, inflation, or rather the issue of price stability. In most IMF stabilization programmes, the Polak model – the basis of financial programming – is at the fore. This model is essentially a version of the monetary approach to the balance of payments and its central equations determine the links (if not the causality) between the fiscal gap and the balance of payment deficit. Since a typical Fund programme aims at creating relative price stability (what this means varies from case to case, at least in the short run) and since the Polak model assumes continuously clearing money markets and a stable velocity of money, IMF programmes perceive a direct link between growth of the money supply and growth of the price level with causality running from the former to the latter.5 The fight for increased price stability may render budget sustainability more difficult to attain in two different ways. First, if the Polak model’s assumption holds, decreasing the rate of growth of the money

16

Fiscal Sustainability in the CAC Region

supply decreases inflation. This means that seigniorage is a nonfavoured method for financing the budget. In fact, governments are encouraged to switch from printing money to domestic and foreign borrowing in the typical Fund programme. It is clear from equation (2.4) that a decrease of seigniorage revenue, ceteris paribus, increases the rate of growth of the public debt, measured as a fraction of nominal output. Hence, a successful anti-inflation programme may increase the debt burden, at least in the short run. The second reason why the fight against inflation may render budget sustainability more difficult to attain is because, ceteris paribus, successful inflation combat increases the real interest rate and thus increases the cost of servicing the domestic debt.6 In fact, the mix of the debt between domestic and foreign currency is probably an important determinant of the government’s willingness to fight inflation. A second important component in current reform programmes is that of achieving a more realistic exchange rate. This is accomplished partly by trying to bring inflation down, partly by one or a series of nominal devaluations (or even the switch to floating exchange rates). As for debt sustainability, a depreciation of the exchange rate serves to increase the local currency value of the foreign debt, thus rendering it more difficult to attain budget sustainability. This problem may be avoided altogether if the current account improves drastically and rapidly after an exchange rate adjustment. However, the lessons to emerge after twenty years of Fund/Bank supported reforms are not very encouraging: the typical current account pattern is that the volume of imports remain relatively stable while exports do not increase, so the country’s capacity to service the foreign debt is actually diminished after the devaluation. The reasons are not difficult to understand: imports to low-income countries are frequently goods which are necessary in production and without domestic substitutes so price elasticities are close to zero. In addition, if the devaluation is accompanied by elimination of exchange controls, imports, particularly of consumer goods, are likely to surge. Exports, on the other hand, do not react swiftly to a change in the exchange rate. This, of course, is because the bulk of exports are still agricultural goods of different varieties the supply of which simply cannot increase rapidly. The result of a devaluation, then, is that the current account deteriorates, sometimes significantly, that the local cost of servicing the foreign debt increases and, consequently, that the prospects for attaining or maintaining fiscal sustainability (at least in the short run) become less entertaining.

Anders Danielson 17

In sum, then, fiscal sustainability as defined in this chapter may be even more difficult to attain if the country also embarks on a reform programme designed along IMF/World Bank lines. In particular, the reform programmes’ insistence on devaluations, increased real interest rates and the constant struggle against inflation renders it more difficult to attain a stable debt-to-output ratio. In addition, the fact that international financing institutions provide finance as loans (albeit often highly concessionary) and that these loans have seniority and are unlikely to be forgiven or rescheduled7 may put countries in the uncomfortable situation of having to increase the debt ratio in order to become eligible for development finance in the future.

Debt and development finance in the CAC region Fiscal sustainability, then, is vital for accomplishing long-run, selfsustained growth. The definition of sustainability in this chapter is one of a non-increasing debt-to-GDP ratio and the question to be examined in this section is not only whether countries have actually attained a fiscal position which is endurable in the long run, but also – and perhaps most importantly – how economic reforms are suggested in the previous section may affect that position. As noted above, continued reforms may jeopardize the fiscal position, not only because ‘economic reforms’ mean access to further loans which consequently add to future debt servicing, but also because the very components of reform change the variables in equation (2.4) such that – ceteris paribus – the rate of debt accumulation increases.8 Tables 2.1 and 2.2 show some macroeconomic indicators for a number of countries in the CAC region. As noted at the outset, the choice of countries is dictated by data availability.9 Furthermore, I have chosen to divide the period of analysis into two sub-periods, 1985–90 and 1990–95, mainly because most countries in the sample initiated reforms in the 1980s, and experience from other parts of the world – mainly sub-Saharan Africa – suggests that the beneficial effects of reforms do not show (if at all) until after several years.10 The data in Tables 2.1 and 2.2 also suggests that the macroeconomic environment improved during the 1990s. In all countries except Haiti, GDP growth is positive in 1990–95; in five of the six countries for which complete data exist, the fiscal position has improved; and in all of the Central American countries and in one Caribbean the ratio of gross investments to GDP has improved. This latter point is particularly important since most cross-country studies of structural adjustment

18

Table 2.1 Macroeconomic indicators for Central American countries, annual averages

GDP per capita (US$) GDP growtha Inflationb Current account balancec Public savingsc Gross Investmentsc

1985–90 1990–95 1985–90 1990–95 1985–90 1990–95 1985–90 1990–95 1985–90 1990–95 1985–90 1990–95

Costa Rica

El Salvador

Guatemala

Honduras

Panama

1,600 1,945 4.7 4.9 16.9 19.8 8.6 7.7 3.8 4.5 26 28

938 1,160 1.8 5.0 21.2 13.9 5.9 4.9 0.5 0.4 13 15

1,012 990 2.4 4.0 21.9 19.3 4.4 5.3 N/A 2.1 13 16

852 625 2.6 2.1 7.8 18.3 8.6 10.5 1.0 3.2 19 25

2,248 2,328 1.8 7.2 1.8 1.7 3.5 5.1 1.9 4.2 13 21

a

Local 1987 prices. Average annual change in GDP deflator. c Per cent of GDP. b

Sources: IFS (1996); World Bank (1996); World Bank (1997).

Anders Danielson 19 Table 2.2 Macroeconomic indicators for Caribbean countries, annual averages Dominican Republic

GDP per capita (US$) GDP growtha Inflationb Current account balancec Public savingsc Gross investmentsc

Haiti

Jamaica

Trinidad and Tobago

1985–90 1990–95 1985–90 1990–95 1985–90 1990–95 1985–90 1990–95

813 1,075 3.8 4.1 33.5 23.7 5.3 2.8

372 435 0.2 5.6 8.8 28.4 7.6 9.3

1,212 1,533 5.0 1.7 18.1 39.7 7.8 4.9

4,463 3,815 2.5 1.2 6.7 8.5 2.1 2.4

1985–90 1990–95 1985–90 1990–95

N/A 6.8 24 20

N/A 4.1 14 6

5.3 6.3 25 30

1.1 1.1 17 14

a

Local 1987 prices. Average annual change in GDP deflator. c Per cent of GDP. b

Sources: IFS (1996); World Bank (1996); World Bank (1997).

(e.g., Mosley, Harrigan and Toye, 1991) indicate that the investment ratio actually fall during the early phases of reform. However, other indicators show a less bright picture. GDP per capita is lower in the latter sub-period for three countries and virtually stagnant for one; inflation has increased in four countries in the sample, and in one of those it has increased by a factor of 3.5 and in another it has more than doubled; and in four out of nine countries, the current account has deteriorated. The data thus suggest that some countries have succeeded better than others have and consequently there is reason to expect that the outcome with respect to sustainability might differ substantially, too. However, the data in Tables 2.1 and 2.2 indicate that the reform process is far from completed. Hence it seems safe to assume that it will continue, which – in view of what was said above about the short-term effects of economic reforms – implies that the estimations of fiscal sustainability presented below are rather optimistic. In a sense, the calculations for debt accumulation represent minimum rates and, if the assumptions made hold true, the years to come will likely see less positive developments of the fiscal position.

20

Fiscal Sustainability in the CAC Region

Tables 2.3 and 2.4 present calculations based on equation (2.4). As the data in these tables are calculated subject to a number of assumptions,11 it will be fruitful to start with a discussion of how the figures have been derived and what are the underlying assumptions. The primary deficit is current expenditures less tax revenue. Consequently, capital expenditures and non-tax revenue are missing. This may be justified by pointing to the fact that, for capital expenditure, a rate of return is generated and if that return is not smaller than the rate of interest paid (implicitly or explicitly) on capital outlays, variations in public investments affect the deficit by less than the actual outlay. As for non-tax revenue, this source of income is important in some countries – particularly those where the government receive substantial revenue from oil or the direct involvement in, say, agricultural activities. However, as shown by Burgess and Stern (1993), non-tax revenue in the Western Hemisphere is 15 per cent of total revenue, by far the smallest for any group of low-income countries. Hence, if the dropping of non-tax revenue is justified for any group of countries, it is for the CAC region. The differences between the row ‘primary deficit’ in Tables 2.3 and 2.4 and the row ‘public savings’ in Tables 2.1 and 2.2 are that public savings include non tax revenue (but not capital expenditure), net interest payments and net official transfers from the rest of the world. The total debt stock is total long-term, public and private, external debt, valued at the current exchange rate, plus total domestic debt. Short-term debt plus purchases from the IMF are excluded.12 The reason is that fiscal sustainability is a long-term concept and identification of the trend will be marred by the inclusion of short-term objects that also may fluctuate significantly. The external debt stock is total debt less domestic debt. Seigniorage is simply the rate of change of base money divided by nominal GDP, i.e., ⌬Mt /Pt yt, where ⌬ is the forward difference operator. This is the conventional definition of seigniorage, but it deserves to be mentioned that if (a) the rate of money velocity varies with the price level and/or (b) the money market is not initially in flow equilibrium, the expression does not measure seigniorage, i.e., the appropriation of real resources by the government through the issuing of intrinsically valueless money (see also Buiter, 1996: 16ff). In short, the notion of seigniorage builds on the assumption that the ratio Mt /Pt yt represents liquidity preference. Our emphasis on long-run relations may justify the employment of money market equilibrium and constancy of the velocity of money.

Anders Danielson 21

Official transfers differ from DAC’s definition of overseas development assistance in that concessionary loans are excluded. Included are thus project aid, programme aid and technical assistance that is given on a grant basis. One problem – as suggested in endnote 2 – is that project aid indirectly affects government current expenditures. This means that the foreign aid which is relevant in the discussion of fiscal sustainability in reality is smaller than the figures in Tables 2.3 and 2.4 – on the average, project aid accounts for some 70 to 85 per cent of all grants. It is useful to keep this in mind when evaluating the tables, as it will make the budgets look more sustainable than what they are in reality. The interest rates are also estimated conservatively, making the budgets look more sustainable that what they are in reality. I have used, for each year in the period, the World Bank’s reported ‘interest rate on new commitments’ from GDF (1997). This is a weighted average of interest rates on private and public loans, the weights being the shares of private and public loans in the entire portfolio. This is likely to be an under-estimate, both because continued financial sector reform is likely to increase nominal interest rates and because successful inflation combat will increase real interest rates.13 Tables 2.3 and 2.4 set out the relevant figures for the sample countries. It deserves to be emphasized that focus should be on orders of magnitude rather than detailed figures, both because a number of assumptions have been made in order to get as much data as possible and because of the possibility that even the existing data may be of questionable quality. For our purposes the most interesting data are in the last three rows · of each table. In the rows denoted ⌬actual are shown the actual calculations of fiscal sustainability according to equation (2.4) for 1985–90 and 1990–95, respectively. The figures should be interpreted to mean the average annual absolute change in the debt-to-GDP ratio for the period concerned. Thus, the figure of 0.7 for Costa Rica in 1985–90 means that the debt-to-GDP ratio increased on average by 0.7 percentage points per annum for the period. Consequently, given the defini· tion of fiscal sustainability introduced earlier (i.e., ⌬0), four of the nine countries appear to pursue fiscal policies that are sustainable. Moreover, for all five Central American countries, the debt position has improved between the two sub-periods; the same applies to the Dominican Republic. Even though a reasonable hypothesis would be that this improvement at least to some extent has taken place because of compliance with IMF stabilization programmes, a close analysis would take us outside

22

Fiscal Sustainability in the CAC Region

Table 2.3 Fiscal sustainability indicators for Central American countries, annual averages, per cent of GDP Costa Rica

El Salvador

Guatemala

Honduras

Panama

Primary surplus

1985–90 1990–95

1.6 0.4

3.5 3.6

1.1 0.1

5.1 3.9

4.6 1.3

Total debt stock

1985–90 1990–95

80.1 95.5

38.2 43.2

31.4 34.6

100.4 89.9

110.8 116.0

External debt stock

1985–90 1990–95

65.8 50.1

14.7 13.1

9.3 8.3

78.9 99.0

85.1 75.4

Seigniorage

1985–90 1990–95

2.0 2.2

1.3 1.2

0.6 1.6

2.2 2.1

0.6 0.0

Official transfersa

1985–90 1990–95

2.7 4.1

6.3 7.7

1.7 1.8

7.6 6.1

1.3 0.8

Interest rate

1985–90 1990–95

7.4 6.2

5.1 5.4

6.2 4.9

6.3 4.4

7.4 5.6

Rate of GDP growth · ⌬actual · ⌬actual · ⌬reform

1985–90 1990–95

4.7 4.9

1.8 5.0

2.4 4.0

2.6 2.1

1.8 7.2

1985–90 1990–95

0.7 2.4 0.2

9.1 11.6 6.8

1.6 2.6 1.1

6.2 5.7 0.3

10.0 2.9 1.6

a

Including technical assistance.

Sources: IFS (1996); World Bank (1997); IMF (1997).

the scope of this chapter. What we can observe, however, is that while stabilization may be under way, it is far from concluded (and this is quite clear from the data in Tables 2.1 and 2.2 as well). In particular, the majority of countries are still not able to pay for current expenditures out of tax revenues and still money printing covers a part of the budget deficit. A minimum condition for the stabilization phase to have been successfully concluded would be that (i) there is no primary deficit and (ii) there is no seigniorage.14 To see whether the present fiscal sustainability will be maintained after a successful stabilization · phase, the last row in Tables 2.3 and 2.4, denoted ⌬reform, applies equation (2.4) to 1990–95 data and the additional assumptions that the fiscal position shows primary balance and that the rate of seignorage is zero. Under this experiment, only three countries – El Salvador, Guatemala and Haiti – pursue sustainable fiscal policies. In the remaining six countries, interest payments exceed the inflow of foreign aid. The tentative conclusion from this exercise, then, is that if the reform process in the CAC region follows the same pattern as in other continents (particularly sub-Saharan Africa), fiscal gaps and debt burdens are likely to grow before macroeconomic stability has been attained.

Anders Danielson 23 Table 2.4 Fiscal sustainability indicators for Caribbean countries, annual averages, per cent of GDP Dominican Republic Primary surplus Total debt stock External debt stock Seigniorage Official transfersa Interest rate Rate of GDP growth · ⌬actual · ⌬actual · ⌬reform a

1985–90 1990–95 1985–90 1990–95 1985–90 1990–95 1985–90 1990–95 1985–90 1990–95 1985–90 1990–95 1985–90 1990–95 1985–90 1990–95

N/A 1.1 62.4 71.2 59.5 42.4 1.6 3.8 1.1 1.5 6.8 5.4 3.8 4.1 3.2 3.2 2.6

Haiti

N/A 4.8 37.1 34.1 27.6 32.3 2.2 1.2 9.9 5.9 1.4 0.7 0.2 5.6 11.3 9.5 3.6

Jamaica

Trinidad and Tobago

2.0 2.3 132.9 146.1 118.5 96.3 3.9 2.6 4.8 4.1 7.1 6.9 5.0 1.7 4.5 9.8 11.7

4.8 0.9 42.1 40.0 34.5 38.4 0.6 0.2 0.2 0.2 8.1 8.5 2.5 1.2 1.7 4.9 5.7

Including technical assistance.

Sources: IFS (1996); World Bank (1997); IMF (1997).

Moreover, fiscal imbalances may jeopardize the reform process for several reasons, including the lure of turning to the printing press for covering the deficit and the demonstrated reluctance of donors to provide funds to governments unable to cope with political conditions agreed with the IMF and the World Bank. As noted above, the fact that reforms as presently designed may not work optimally is no reason to abandon reforms. A case can be made, however, for paying more attention to the order and speed in which reforms have been introduced and to the role of the external debt. As demonstrated above, macroeconomic stabilization may be very difficult to attain in the presence of a large debt, inadequately developed financial markets and an inefficient tax system. Eventually, the objective is to be able to finance current expenditures out of tax revenues, but the design and implementation of a fair and efficient tax system is difficult to do in a macroeconomically unstable situation. Consequently, the stabilization phase of economic reforms is an extraordinary situation and calls for extraordinary finance. As seen in Tables 2.3 and 2.4,

24

Fiscal Sustainability in the CAC Region

most countries in the CAC region rely on seigniorage for financing the deficit. If reforms are carried though and, in particular, if money printing is abandoned by the government as a means of appropriating real resources, only a few countries will be able to finance current, noninterest expenditures by tax revenue and no country will be able to finance total current expenditures without resort to lending. To this, one might add the observation that levels of foreign aid are falling throughout the world (Danielson, 1997b), implying that a larger share of interest payments will have to be financed from normal sources of revenue. The data presented in this chapter seems to suggest that increased fiscal instability and higher rates of debt accumulation are likely to result. If fiscal stability is necessary for successful economic reforms, if seigniorage is not an option and if foreign aid is dwindling, what are the alternatives? International financial institutions seem to suggest in their reform programmes tighter conditionality, more politicized demands (such as the removal of high officials suspected of corruption), more frequent evaluations of performance, and faster reforms. Even though these issues fall outside the scope of this chapter, it should be noted, first, that to the extent that there is a correlation between harshness of conditions and performance, that correlation is negative (Mosley, Harrigan and Toye, 1991) and, second, that an increasing volume of research suggests that some of the causal relations on which the IMF–World Bank reforms are founded are non-existing at best and reversed at worst.15 The Fund’s and Bank’s experience in subSaharan Africa for the past two decades (and the Bank’s willingness to alter the reform strategy) also suggest that economic reforms are not as easy to accomplish as textbook models would seem to suggest. One alternative to harsher conditions and faster reforms would be to write down the levels of debt. Tables 2.5 and 2.6 provide basic data for the CAC countries with comparisons to Latin America as a whole and all developing countries. The picture that emerges from these tables is rather clear: CAC countries have higher levels of debt, pay more interest in relation to GDP and have a higher share of multilateral debt than either Latin America or the developing world as a whole. The fact that debt level and the debt servicing ratio are high imply that there is a tighter constraint on economic growth for CAC countries than for other countries: a large debt may give rise to a debt overhang which depresses domestic investment, and a high debt servicing ratio means that scarce foreign exchange is allocated away from paying for imports of commodities necessary in production.16 In addition, the high share

Table 2.5 Debt indicators: Central America

External debtstocka Debt servicingb Interest paymentsa Multilateral debta Concessional debta a b

Costa Rica

El Salvador

Guatemala

Honduras

Panama

ALL LDC

Latin America

1985–90 1990–95

101.6 57.9

49.4 34.8

35.4 27.9

94.7 127.4

118.6 117.6

35.6 57.2

38.6 42.6

1985–90 1990–95

27.4 18.6

19.8 13.9

24.9 14.4

29.1 31.5

4.8 5.8

21.0 34.3

17.8 25.8

1985–90 1990–95

5.5 3.4

2.1 1.5

1.8 1.3

3.9 5.7

3.8 3.9

2.0 3.8

1.7 2.1

1985–90 1990–95

23.1 31.7

36.0 46.3

31.8 31.5

41.1 47.1

17.1 11.0

12.7 10.6

14.4 12.1

1985–90 1990–95

17.7 23.8

51.0 53.5

20.0 33.0

34.4 39.0

6.9 6.3

18.6 9.3

21.5 10.0

Percentage of GDP. Percentage of exports.

Source: World Bank (1997).

25

26

Fiscal Sustainability in the CAC Region

Table 2.6 Debt indicators: Caribbean Dominican Haiti Jamaica Trinidad All Latin Republic and LDC America Tobago External debt stocka Debt servicingb Interest paymentsa Multilateral debta Concessional debta a b

1985–90 1990–95 1985–90 1990–95 1985–90 1990–95 1985–90 1990–95 1985–90 1990–95

75.9 50.3 16.3 12.9 3.2 1.6 18.4 20.5 27.6 40.7

34.6 38.5 12.5 12.7 0.8 0.5 50.7 66.9 72.5 78.8

164.0 125.7 37.5 23.8 10.2 6.6 22.8 27.0 27.2 30.6

43.5 51.0 17.7 22.8 3.5 3.8 3.6 12.0 3.2 2.4

35.6 57.2 21.0 34.3 2.0 3.8 12.7 10.6 18.6 9.3

38.6 42.6 17.8 25.8 1.7 2.1 14.4 12.1 21.5 10.0

Percentage of GDP. Percentage of exports.

Source: World Bank (1997).

of multilateral debt for CAC countries indicates that the scope for bilateral debt forgiveness is slim. The initiative to provide multilateral debt relief to highly indebted poor countries (HIPCs), which currently covers only two countries in CAC – Honduras and Nicaragua – needs to be expanded to additional countries in order to pave the way for fiscal sustainability in the region.

Concluding remarks One of the major problems facing countries attempting to pursue marketbased reforms is inflation. Without a stable macroeconomic environment, reforms are not perceived as credible, and investors – local and foreign – prefer to adopt a wait-and-see attitude. The problem is that some reforms – particularly the reallocation of resources from nontradables to tradables production – cannot take place without the active participation of the private sector. The reason why inflation persists at relatively high levels in most countries differs from country to country. However, most countries have – or have had – considerable fiscal deficits which are the root of the evil: Milton Friedman’s famous statement that inflation is always and everywhere a monetary phenomenon is correct. However, governments do not print money at a rapid rate out of a clear blue sky.

Anders Danielson 27

They generally print money to cover their budget deficit. Rapid money growth is conceivable without an underlying fiscal deficit, but it is unlikely. Thus rapid inflation is almost always a fiscal phenomenon. (Fischer and Easterly, 1990: 138–9) The basic argument of this chapter is that fiscal balance (in some sense) is necessary for successful reforms. If we take as given the role of the IMF in the reform process, seigniorage is not an option. Consequently, we should expect inflation to come down. However, it is far from certain that this also will mean macroeconomic stabilization. As pointed out above, emphasis on stabilization in the absence of sufficient funds may mean rapid debt accumulation and thus an unsustainable fiscal position. The data analyzed in this chapter suggests that the current reform strategy needs to be redesigned and alternative financing options explored. One such option – at least in terms of magnitude – that needs further exploration is debt relief.

Notes 1. Danielson (1997a) provides a framework for analyzing these effects. 2. Note that the components of the equation are interrelated. Thus, for instance, in ‘foreign aid’ is included programme as well as project aid. The latter is often given on the condition that the recipient covers recurrent costs which consequently is reflected in a larger g. 3. The no-Ponzi game condition is equivalent to the intertemporal budget constraint defined for the indefinite future. 4. See Obstfeld and Rogoff (1996: 121–4) for an exposition of the no-Ponzi game condition. 5. It deserves to be pointed out that several studies fail to find particularly strong correlation between money growth and inflation, let alone being able to establish causality. The failure of IMF programmes to take this into account may be part of the explanation as to why the ‘tight money reform’ approach advocated by the Fund does not always succeed in bringing inflation down. For further discussion, seen Agénor and Montiel (1996), Easterly and Schmidt-Hebbel (1994) and Taylor (1993a). 6. An additional and related reason why stabilization may render fiscal sustainability more difficult to attain is when increased real interest rates increases the cost of production and, thus, lowers the rate of growth of output. See Taylor (1994). 7. I ignore the recent initiative according to which parts of the multilateral debt may be forgiven or rescheduled as this concerns a handful of mostly African countries. A critical analysis may be found in analyses by the European Network on Debt and Development (EURODAD). See EURODAD (1996).

28

Fiscal Sustainability in the CAC Region

8. That economic reforms may undermine attempts to attain fiscal sustainability does not imply that reforms should be abandoned, only that they should be redesigned. 9. Although well aware of the unreliable quality of data in several low-income countries, I nevertheless rely for my analysis heavily on official statistics – particularly from IMF and the World Bank. Although the usual excuse for this – ‘what’s the alternative?’ – could apply, I would argue that an analysis of fiscal sustainability based on data from international financial institutions makes sense because the decisions in those institutions to continue to press for reforms and authorize further loans is to a large extent based on the same data material as that used in this chapter. 10. See, for instance, Mosley, Harrigan and Toye (1991), Sahn (1994) or World Bank (1994). 11. The difficulty in translating the theoretical concepts in equation (2.4) into corresponding real numbers is probably the reason why only very few studies of fiscal sustainability have been published. The only ones I have been able to locate are Buiter and Patel (1992) and Haque and Montiel (1994). 12. Concessionary loans from the IMF under various adjustment facilities are included. 13. A natural extension of this chapter would be to divide the total debt into internal and external components, with the line of demarcation being the currency in which the loan is denominated, in order to work out the optimal rate of inflation from the point of view of the government which on the one hand wishes to erode the real value of the domestic debt and on the other wishes to prevent the local currency value of the external debt from increasing. 14. On the assumption that the money market is in flow equilibrium, the only reason for the government to increase the money-to-GDP ratio would to appropriate resources through seigniorage. 15. See Taylor (1993b) for a survey and Woodward (1992) and Griesgraber and Gunter (1996) for analyses. 16. See Krugman (1989) and Sachs (1989) for discussions of the debt overhang and Danielson (1997a) for an empirical analysis.

References Agénor, P.-R. and P. Montiel (1996) Development Macroeconomics, Princeton, NJ: Princeton University Press. Buiter, W. (1985) ‘A Guide to Public Sector Debt and Deficits’, Economic Policy, vol. 1. Buiter, W. (1996) Aspects of Fiscal Performance in Some Transition Economies Under Fund-Supported Programmes, London: CEPR Discussion Paper No. 1535. Buiter, W. and U. R. Patel (1992) ‘Debts, Deficits and Inflation: An Application to the Public Finances of India’, Journal of Public Economics, vol. 47. Burgess, R. and N. Stern (1993) ‘Taxation and Development’, Journal of Economic Literature, vol. 31. Danielson, A. (1997a) ‘Debt Relief and Structural Adjustment in Tanzania’, in L. Peterson (ed.), Post-Apartheid Southern Africa, London: Routledge.

Anders Danielson 29 Danielson, A. (1997b) ‘Policy Coherence Towards Developing Countries: The Case of Sweden’, in J. Forster and O. Stokke (eds), Policy Coherence Towards Developing Countries, London: Frank Cass. Easterly, W. and K. Schmidt-Hebbel (1994) ‘Fiscal Adjustment and Macroeconomic Performance: A Synthesis’, in W. Easterly, C. A. Rodríguez and K. Schmidt-Hebbel (eds), Public Sector Deficits and Macroeconomic Performance, Oxford: Oxford University Press. EURODAD (1996) ‘Multilateral Debt: Towards a Solution?’, World Credit Tables. Creditors’ Claims on Debtors Exposed, Brussels: EURODAD. Fischer, S. and W. Easterly (1990) ‘The Economics of the Government Budget Constraint’, World Bank Research Observer, vol. 5. Funke, N. (1993) ‘Timing and Sequencing of Reforms: Competing Views and the Role of Credibility’, Kyklos, vol. 46. Griesgraber, J. M. and B. G. Gunter (eds) (1996) Rethinking Bretton Woods, 4 vols, London: Pluto Press. Haque, N. U. and P. Montiel (1994) ‘The Macroeconomics of Public Sector Deficits: The Case of Pakistan’, in W. Easterly, C. A. Rodríguez and K. SchmidtHebbel (eds), Public Sector Deficits and Macroeconomic Performance, Oxford: Oxford University Press. IFS (1996) International Financial Statistics, Yearbook 1996, Washington DC: IMF. IMF (1997) World Economic Outlook, May 1997, Washington, DC: IMF. Krugman, P. (1989) ‘Market-Based Debt Reduction Schemes’, in J. A. Frenkel, M. P. Dooley and P. Wickham (eds), Analytical Issues in Debt, Washington, DC: IMF. McKinnon, R. (1991) The Order of Economic Liberalization: Financial Control in the Transition to a Market Economy, Baltimore, MD: Johns Hopkins University Press. Mosley, P., J. Harrigan and J. Toye (1991) Aid and Power, London: Routledge. Obstfeld, M. and K. Rogoff (1996) Foundations of International Macroeconomics, Cambridge, MA: MIT Press. Rodrik, D. (1989) ‘Credibility of Trade Reforms: A Policy-Maker’s Guide’, World Economy, vol. 12. Sachs, J. (1989) ‘The Debt Overhang of Developing Countries’, in G. Calvo, R. Findlay, P. Kouri and J. B. de Macedo (eds), Debt, Stabilisation and Development: Essays in Honor of Carlos Díaz-Alejandro, London: Blackwell. Sahn, D. E. (ed.) (1994) Adjusting to Policy Failure in African Economies, Ithaca, NY: Cornell University Press. Taylor, L. (1993a) ‘Stabilization, Adjustment and Reform’, in L. Taylor (1993b). Taylor, L. (ed.) (1993b) The Rocky Road to Reform, Cambridge, MA: MIT Press. Taylor, L. (1994) ‘Gap Models’, Journal of Development Economics, vol. 45. Woodward, D. (1992) Debt, Adjustment and Poverty in Developing Countries, 2 vols, London: Pinter. World Bank (1994) Adjustment in Africa: Reforms, Results and the Road Ahead, Washington, DC: World Bank. World Bank (1996) Trends in Developing Economies, Washington, DC: World Bank. World Bank (1997) Global Development Finance on CD-ROM, 1997, Washington, DC: World Bank.

3 The Fruits of Interest: Financial Liberalization and Banking in Central America Trevor Evans1

Introduction In the first half of the 1990s, the banking systems in most Central American countries underwent a major change following the introduction of policies of financial liberalization.2 The advocates of financial liberalization argue that the elimination of government controls will, by allowing interest rates to rise, encourage higher savings and thereby make more funds available for investment. They claim that higher interest rates will in addition result in finance being directed towards the most profitable investment projects, and that this will enable countries to achieve higher rates of growth. They also believe that a competitive system of privately owned banks is required so that costs will be kept to a minimum, and banks will have an incentive to seek out successful clients. One of the great weaknesses of this approach is that it has a very unrealistic view of financial systems. Banks and other financial institutions are conceived of simply as intermediaries who act as a neutral link between economic units with savings and those that want to invest. In Central America, however, banks have since their inception been closely tied to the interests of a small number of powerful economic groups. This chapter therefore begins with a brief review of the development of the banking systems in Central America. It shows how the recent process of privatization in three of the countries has enabled private economic groups to reconsolidate their grip on the banking systems, and how deregulation has made banking one of the most profitable activities in the region. The chapter continues with an analysis of interest rates in the region. This shows that since the early 1990s, deposit rates have been at 30

Trevor Evans 31

around, or slightly above, the rate of inflation in most countries, but that lending rates have been much higher, and that one of the principal reasons for this is the high spreads which provide the banks with their profits. The idea that higher interest rates promote saving is derived from the neoclassical view of saving as an individual choice to postpone consumption. However, if higher interest rates serve to discourage investment, then this would tend to have a negative impact on the level of production, and consequently on the generation of savings. The chapter looks at the figures for Central America, and finds that while saving picked up in most countries in the 1990s, the evidence suggests that this is related mainly to a resumption of economic growth in the region. Finally, the chapter considers what has happened to investment. The figures indicate that while investment rose in the 1990s, it remained below the rate achieved in the 1970s. Furthermore, there has been a major shift in the composition of bank lending, away from agricultural and industrial production and towards commercial activities, and this has led to a particularly sharp reduction in the availability of credit for small producers.

The development of banking in Central America Commercial banks were first established in Central America in the second half of the nineteenth century, and, until the mid twentieth century, their development was closely linked to the interests of commercial producers of coffee, for many years the region’s most important export product.3 Between the late 1930s and 1950, the governments of the region took steps to regulate their banking systems, creating central banks, and a legal structure which, to a large extent, continued in force until the recent round of reforms. The main features of this system were a central bank, directly under the control of the national government, one or more state-owned development banks, and privately-owned commercial banks. The central bank set interest rates and exchange rates, and generally also played an important role in determining how credit was assigned in the economy. In the post-war years, the basis of the banking system broadened beyond coffee interests, extending first to new agricultural export products in the 1950s and 1960s, and then to manufacturing industry in the late 1960s and early 1970s – the development of each new sector,

32

Financial Liberalization and Banking

significantly, having been actively promoted by government-directed credit programmes. It was, therefore, not until the 1970s that modern commercial banks spanning agriculture, industry and commerce were established in most Central American countries. An important feature of these banks, however, was that they were closely linked with powerful economic groups, often serving as the nexus around which a range of other economic activities were organized. In Nicaragua, for instance, the Somoza family and the other two main capitalist groups each organized their interests in large conglomerates based on one of the country’s three principal banks (Wheelock, 1980). The main exception to this situation was Costa Rica, where the social-democratic government nationalized the commercial banks in 1948, on the grounds that they operated with the savings of the whole nation, and should therefore be accountable to the government in order to ensure that access to credit would be democratized (Brenes, 1990). The other exception was Panama, where the US dollar functioned as the national money, and where there was consequently no central bank, although in practice the state-owned Banco Nacional performed a number of central-bank functions, including that of banker to the government, and responsibility for organizing the supply of US dollar bank notes. Also, while foreign banks have not had a significant presence in other Central American countries, in Panama the government established an international banking centre in 1970, an initiative which had attracted 100 foreign banks by 1980 (CEMLA, 1981). This set of arrangements, which delivered monetary and exchangerate stability for more than a quarter of a century, was disrupted by the generalized crisis which erupted in Central America at the end of the 1970s as a result of the revolutionary conflicts in Nicaragua, El Salvador and Guatemala, and the economic problems engendered by the collapse of commodity prices, the debt crisis, and the flight of capital from the region. In 1979, the new Sandinista government nationalized the banking system in Nicaragua, and in 1980, the short-lived junta of young officers did the same in El Salvador. In both cases, the policy was justified by the need to break up entrenched blocks of economic power. In Nicaragua, this did lead to a significant expansion of rural credit for small producers, although the principal beneficiaries were the newlyestablished state enterprises (Enríquez and Spalding, 1987); in El Salvador, on the other hand, in the absence of any other significant changes in policy, the main beneficiaries of credit continued to be the wealthy and those with political connections (CENITEC, 1989). At all

Trevor Evans 33

events, in both countries, loans were frequently not repaid, and, in the course of the 1980s, this led to a decapitalization of the banking systems. In Guatemala, Costa Rica and Honduras, inflation in the 1980s encouraged a process of disintermediation, and a range of legal and semi-legal financial institutions were created in order to evade government regulations concerning reserve requirements and interest rates. These so-called financieras were generally either owned by private banks (Guatemala and Honduras) or were the precursors of new private banks (Costa Rica). The private banks in these countries also established offshore affiliates in either Panama or the Caribbean through which they could channel transactions and so avoid government controls. The financieras and the offshore affiliates provided the basis for highly profitable operations in the non-official foreign exchange markets, thereby exacerbating financial instability in the countries concerned. Effectively they neutralized the ability of central banks to regulate the financial sector, and were a major force in pressing for greater privatization and deregulation.

Financial liberalization The introduction of financial liberalization programmes in Central America can be traced to three main factors. Firstly, there was the pressure of politically influential groups with an economic interest in financial activities. Secondly, following the electoral defeat of the Sandinista government in Nicaragua in 1990, for the first time in many years, the governments of the region all shared a very similar, essentially pro-business outlook. Thirdly, and most decisively, the Washington-based international institutions insisted on financial liberalization policies as one of the conditions of providing governments with external finance. In the early stages, the United States Agency for International Development (AID) played a key role, especially in promoting the privatization of commercial banks, but by the early 1990s every country in the region was implementing stabilization and structural adjustment programmes negotiated with the International Monetary Fund and the World Bank. These programmes specified a wide range of policies, and those concerned with financial liberalization were established principally in agreements with the World Bank and the Inter-American Development Bank. In most countries, the process of financial liberalization began between 1991 and 1993, and was largely complete by 1995. In Costa Rica, however, the process was much more drawn out, lasting from

34

Financial Liberalization and Banking

1984 until 1995, while in Panama, many of the policies had already been introduced in 1970 with the creation of the international banking centre, although even here, a series of financial reforms were proposed in the early 1990s. Despite some differences of timing, the policies that have been introduced are virtually identical in all the countries. The main features of the new model are as follows:

The central bank is to focus on guaranteeing monetary stability. It is prohibited from lending to the government, except in very exceptional circumstances, and from lending directly to commercial banks, except in its function as lender of last resort. Monetary policy is to be realized through open market operations.4 State-owned commercial banks are to be privatized. State-owned development banks are to be privatized or dramatically scaled down. Bank supervisory agencies are to be strengthened and made more independent of the government, and are to operate on the basis of prudential regulations. These regulations are based on current international standards, as established in the 1988 Basle Accords, and include a minimum capital requirement of 3 million US dollars; a capital adequacy requirement of between 8 and 10 per cent of total assets; and a limit on loans to related companies of 30 per cent of capital.5 Direct controls on interest rates and exchange rates have been eliminated, and policy is now supposed to be effected through open market operations. Controls on international capital flows have been eliminated, and foreign currency accounts have been legalized.6 Second-tier banks have been created to channel external lines of credit to commercial banks. Securities markets have been set up where they did not exist.

The structure of the banking systems in the 1990s Financial liberalization has been accompanied by a striking expansion of the banking sector in every country of the region. With the elimination of interest-rate controls, the spread between deposit and lending rates widened sharply, and as bank profits rose, many new banks were established. However, rather than the competitive model of neutral intermediaries envisaged by neoclassical theory, this has resulted in a

Trevor Evans 35

banking structure in which banks are closely linked to powerful economic groups, and in which a few large banks dominate the sector in most countries. In the three countries where the banking systems had been nationalized, privatization has played a decisive role. In El Salvador, the government injected some 300 million dollars into the state-owned banks to cover bad loans, and then sold the banks off, mainly in 1991 and 1992 (Banco Central de Reserva, 1994). Officially, there was a limit of 5 per cent on the number of shares that any individual or institution was permitted to acquire, but in practice this was extensively circumvented through the use of third parties (Sorto and Segovia, 1992). As a result, control of the newly privatized banks passed to some of El Salvador’s most powerful traditional groups, although the then president, Alfredo Cristiani, and his wife, until then regarded as second-tier players, emerged with control of the country’s second largest bank, the Cuscatlán.7 By 1995, there were 13 private banks in El Salvador, of which eight had been privatized, four were newly created, and one was foreign (Superintendencia del Sistema Financiero, 1995). In Nicaragua, the constitution stipulates that the banks should be nationalized, and the government therefore proceeded by arguing, somewhat dubiously, that the provision only applied to existing banks, and on this basis it authorized the creation of new private banks. The first new banks opened at the end of 1991, and by the end of 1995 there existed a total of eleven private banks (Superintendencia de Bancos, 1995). Of these, five are in some way linked to the two economic groups which, along with the Somoza group, had occupied a commanding position in the Nicaraguan economy prior to the Sandinista revolution.8 The expansion of the private-bank sector was accompanied by a sharp contraction of the state-owned banks, spearheaded by IMF requirements for them to wind-down their loan portfolios and transfer capital to the central bank.9 In Costa Rica, where nationalized banks were for many years a key feature of the country’s social-democratic development model, private banks were not actually prohibited, but they were not allowed to operate current accounts. Political opposition to the privatization of banking was particularly strong in Costa Rica, and here too, the government had to proceed by promoting the creation of new private banks, and even this could only be implemented slowly. The first steps were taken in 1984 when, at the insistence of US AID, the country’s banking laws were changed to permit private banks to channel foreign aid, and the process continued until 1995, when a new banking act finally eliminated the

36

Financial Liberalization and Banking

state monopoly of current accounts (Sojo, 1992; González and Mesalles, 1993). By 1995, there were 24 private banks, 15 of which had been established since 1984. Most of the new banks are owned by the country’s largest commercial groups, which have grown rapidly in recent years, although the largest of the new banks is owned by the Pellas family of Nicaragua (Sojo, 1995). Despite the growth of private banks, however, state banks still occupy the leading position in Costa Rica, although they are under great pressure to merge and rationalize. In Guatemala and Honduras, where the banking sector has always been predominantly privately owned, financial deregulation in the early 1990s was followed by a significant expansion in the number of banks. In Guatemala there were 30 private banks in 1995, of which 14 had been established since 1990, while in Honduras, there were 20 private banks, of which 6 had been set up since 1990, and in both countries virtually all the banks form part of economic groups.10 In Honduras, the World Bank pushed strongly for the state-owned development bank to be closed, or at least privatized, but following strong resistance from the government it finally accepted the creation of a mixed model with private capital (Table 3.1). Finally, in Panama, while the private banking system has been deregulated in most respects since 1970, the largest nationally owned bank, the Banco Nacional, is owned by the state. Private bankers claim that the bank enjoys a number of unfair competitive advantages, such as interest-free access to public-sector deposits, and in the early 1990s the government proposed to eliminate some of these. Although no major changes were actually implemented, the government’s position did indicate a more sympathetic approach to private business than had existed prior to the US invasion in 1989. While some foreign banks withdrew from the country in the aftermath of the confrontation between General Noriega and the US government, the number of domestically owned private banks increased, and of the 21 such banks that existed in 1995, six had been established since 1990.11 Most of the domestically owned private banks are closely linked to groups with interests in a wide range of other economic activities (Hughes and Quintero, 1987). Despite the proliferation of private banks in Central America, in each country a small number of banks occupy a dominant position, and the largest of the private banks have been the ones to benefit most from the higher profitability that has followed the elimination of interestrate controls. In El Salvador, for example, the largest bank registered a rate of return on capital of 35 per cent in 1995, while in Nicaragua the

Table 3.1 Indicators of financial institutions in Central America, 1995 Costa Rica No of banks, total of which private Total bank assets, millions of US dollars of which private, % Total bank assets, % GDP Assets of largest state bank, millions of US dollars as % of total bank assets Assets of largest private bank, millions of US dollars as % of private bank assets Stock exchange transactions, millions of US dollars a

El Salvador

Guatemala

Honduras

Nicaragua

Panamaa

27 24 3,724

14 13 5,098

33 30 3,844

23 20 1,823

14 11 1,026

23 21 8,831

21.2 44.0 1,570

96.3 53.1 187

93.7 26.8 125

92.3 49.7 81

52.0 56.6 291

60.6 111.7 2,946

42.2 123

3.7 1,180

3.3 386

4.4 223

28.4 98

33.4 1,032

15.6 9,014

24.0 2,412

10.7 8,720

13.6 1,213

18.4 250

19.3 233

Includes only domestically owned banks.

Sources: Superintendencia General de Entidades Financieras (Costa Rica) (1995); Superintendencia del Sistema Financiero (El Salvador) (1995); Superintendencia de Bancos (Guatemala) (1997); Banco Central de Honduras (1995); Superintendencia de Bancos de Nicaragua (1996); KPMG (1995); Cárdenas (1996); Bolsa de Valores de Panamá (1996).

37

38

Financial Liberalization and Banking

figure was 52 per cent.12 In the countries where figures are available, however, smaller banks have generally registered a lower rate of return, or even made a loss. It is therefore likely that the number of banks will decline somewhat as a result of take-overs or closures.13 In addition to encouraging the creation of new private banks, financial liberalization has also led to the setting up of securities markets. Such markets had existed in Costa Rica since 1976, and in Guatemala since 1987, but in the other countries of the region they were established in the early 1990s as part of the recent round of financial initiatives. In each case, the state played an important initiating role, and, although the new exchanges are intended to provide a market-based alternative to bank finance, in fact the banks are the main players in the markets. The value of securities transactions expanded very rapidly throughout the region in the early 1990s, but most transactions involved government securities, and a high proportion was in shortterm instruments.14 The one exception is Panama, where bonds issued by private companies accounted for 60 per cent of transactions in 1995. But throughout the region, virtually no shares have been issued.15 The reason seems to be clear: most companies are owned by family groups and they do not want their control to be diluted. The structure of the financial system in Central America has therefore, like much else in the region, been greatly affected by the important role of economic groups.16 Within the groups, the function of the banks has in the past been to raise funds for other companies in the group, something which is certainly significant in explaining the proliferation of new banks in Costa Rica and Honduras. However, there are indications that the position of the banks within the groups might be changing under the impact of deregulation. In Honduras, for example, the increase in interest rates has meant that the most important profit centres in the groups have shifted from non-financial companies to the banks.17 The Honduran authorities hope that banks will become more reluctant to continue financing non-performing companies in the same group, and that instead, they will compete to finance the most profitable companies, irrespective of the groups they are linked to. In El Salvador, which has some of the largest private banks in the region, there are also indications that the process of privatization and deregulation has contributed to an important shift in the locus of accumulation of the economic groups.18 The nationalization of the banks in 1980, and a land reform programme, introduced at the insistence of the United States Agency for International Development in the mid1980s, broke up the power base of many of the country’s traditional

Trevor Evans 39

ruling families, and, in the face of the military advance of FMLN (Frente Farabundo Martí para la Liberación Nacional) rebels, many abandoned the country for the United States of America. Some of the families that maintained a presence in the country managed to transfer the locus of their activities to the commercial and financial sectors, which proved to be the most dynamic sectors of the economy in the 1990s. At the same time, those families that left the country during the war, and did not have the necessary political connections when the banks were privatized, failed to transfer their economic base to the new urban activities, and have suffered a relative marginalization. Certainly, it is notable in both El Salvador and Nicaragua that sharp young men and women from the leading families, in many cases with doctorates acquired in the United States, are running the new private banks. It is not yet clear what will happen in the event that the interests of banks come into conflict with those of other companies in a group. Nevertheless, the impact of the policies of financial deregulation is likely to be strongly affected by the important role of the groups in the structure of the banking systems in Central America. As has been pointed out by Vicente Galbis, an IMF economist who is broadly in favour of financial liberalization, and who is one of the few writers to have addressed the issue, failure to take account of the existence of economic groups could mean that liberalization programmes will not achieve their aims, and could even be counterproductive (Galbis, 1986).

Interest rates As part of the programmes of financial liberalization, governments first moved to set interest rates so that they would be positive in real terms, and then controls on interest rates were removed, usually in a number of steps (Table 3.2).19 In addition, in Nicaragua, which suffered from hyperinflation, interest rates have been indexed against the dollar since 1991, and, since inflation closely follows the rate of devaluation, this has meant that quoted interest rates are, in effect, real rates. In real terms, deposit rates were negative for much of the 1980s in every Central American country except Panama. Since liberalization, however, real deposit rates have generally been around zero or slightly positive, something that was achieved by a combination of controlling inflation and a rise in nominal rates, with the control of inflation generally being the more important factor. This is borne out by Honduras, where there was a new surge of inflation in 1993–94, following a large increase in public spending in the run-up to a general election, resulting

40

Financial Liberalization and Banking Table 3.2 Liberalization of interest rates

Costa Rica El Salvador Guatemala Honduras Nicaragua

First move to positive real rates

Complete deregulation

1983 1989 — 1990 1988

1989 1991 1989 1991 1992–93

Source: CEPAL (1995).

in a return to strongly negative rates. In Nicaragua, however, where deposits are indexed to the dollar, the real rate of return was equivalent to around 12 per cent, which is far higher than in any other country in the region. In the case of Costa Rica, El Salvador and Guatemala, there was a close relation between fluctuations in the deposit rate and the rate of inflation after rates had been liberalized.20 Since inflation continued to vary considerably, while real deposit rates were relatively steady, this indicates that nominal rates were consciously set with reference to inflation. In contrast to real deposit rates which, with the exception of Nicaragua, have been moderate, real lending rates have been high throughout the region. In the period from 1992 to 1996, they averaged around 6 per cent in El Salvador and Honduras; 10 per cent or more in Panama, Honduras and Costa Rica; and an exceptional 20 per cent in the case of Nicaragua (see Table 3.3). There are several factors that might account for such high rates. First, the liberalization of interest rates was preceded or accompanied by the implementation of stabilization programmes negotiated with the IMF, which involved a restrictive monetary policy. Nevertheless, such policies have not been applied consistently, and in most countries, once the most urgent pressures on the balance of payments and inflation have been alleviated, monetary policy has again become much more flexible.21 In Nicaragua, however, monetary policy was consistently restrictive, and domestic credit actually contracted in 1995 and 1996 as the state-owned banks were obliged to reduce their loan portfolios. Also, in El Salvador, the central bank has engaged in substantial open market operations in an attempt to sterilize the impact of family remittances from migrant workers in the United States, estimated at some

Table 3.3 Real rates of interest in Central America, 1990–96 1990

1991

1992

1993

1994

1995

1996

Average 1992–96

Deposit rates Costa Rica El Salvador Guatemala Honduras Nicaragua Panama

2.2 6.2 22.5 14.3 9.5 7.6

1.4 1.6 10.7 23.0 11.6 6.5

6.2 0.4 0.4 3.4 12.0 3.8

7.1 3.5 0.8 0.9 11.6 5.4

4.3 2.9 1.2 10.0 11.7 4.8

0.7 4.4 0.5 17.7 11.1 6.2

0.3 4.1 3.4 7.1 12.3 5.9

1.1 1.7 0.8 6.1 11.7 5.3

Lending rates Costa Rica El Salvador Guatemala Honduras Nicaragua Panama

13.6 3.0 17.5 6.1 22.0 8.2

10.1 5.2 1.1 12.6 17.9 10.5

6.5 5.3 9.5 12.8 19.3 8.8

20.2 0.7 12.9 11.3 20.2 9.6

19.6 8.4 12.1 3.1 20.1 8.9

13.5 9.1 12.7 2.7 19.1 10.1

8.7 8.7 11.7 6.0 20.7 9.4

13.7 6.4 11.8 6.1 19.9 9.3

Source: Average of quarterly rates calculated from IMF (1997).

41

42

Financial Liberalization and Banking

Table 3.4 Reserve requirements on current accounts in national currency (per cent)

Costa Rica El Salvador Guatemalaa Honduras Nicaragua a

1991

1992

1993

1994

1995

1996

28 19 26 35 10

34 25 206.5 34 10

36 25 21.515 36 10

40 30 1419.5 40 10

43 30 1419.5 34 15

25 30 1417.5 34 15

Reserve requirement plus obligatory investment in Certificados del Banco de Guatemala.

Source: CMCA (1997b).

one billion dollars a year. In order to sell its Certificates of Monetary Stabilization, the central bank has had to offer attractive rates of interest, thereby putting upward pressure on commercial bank rates, which could explain, at least in part, why real deposit rates are some 2 per cent higher in El Salvador than in Costa Rica or Guatemala (Danby, 1995). A second factor in explaining high lending rates is that reserve requirements are high in most countries (see Table 3.4). This is in part because reserves deposited at the central bank are used to finance the fiscal deficit. In addition, having abolished direct controls, an increase in reserve requirements is one of the few instruments still available to central banks if they consider it necessary to tighten monetary policy. The most dramatic example of this occurred in Honduras in 1994, when, faced with a major foreign-exchange deficit, reserve requirements were raised from 34 to 40 per cent. If banks are required to deposit a part of their liabilities with the central bank without interest payments, they recuperate the ‘lost’ income by charging higher interest rates on the loans they do make.22 In fact, Costa Rica launched a tax reform programme in 1995, aimed at raising tax collection, so that reserve requirements could be reduced, and in this way encourage a reduction of bank lending rates – a policy that appears to have had some success in 1996. It should be noted, however, that reserve requirements in Nicaragua are, at 15 per cent, much lower than in neighbouring countries, even though real lending rates are the highest in the region. A third important factor in explaining high lending rates is that the spread between deposit and lending rates has risen and is now much higher than prior to liberalization. In Costa Rica, it has been argued that the size of the spread is due to the inefficiency and high operating costs of the state-owned banks, and that the private banks take advantage of

Trevor Evans 43 Table 3.5 Bank interest-rate spreads in Central America, 1990–96

Costa Rica El Salvador Guatemala Honduras Nicaragua Panama

1990

1991

1992

1993

1994

1995

1996

Average 1992–96

11.4 3.2 5.1 8.3 12.5 0.6

11.6 3.6 9.7 10.4 6.3 4.1

12.7 4.9 9.0 9.3 7.3 4.9

13.1 4.1 12.1 10.5 8.6 4.2

15.3 5.5 13.2 13.1 8.4 4.0

12.8 4.7 13.3 15.0 8.7 3.9

9.0 4.6 15.1 13.0 8.4 3.4

12.6 4.8 12.6 12.2 8.3 4.1

Source: Average of quarterly figures from IMF (1997).

this situation and set rates of interest at the same level, thereby earning substantial profits (González and Camacho, 1994). A similar argument has also been advanced in Nicaragua, where spreads rose to around 8 per cent following liberalization. However, it is noticeable that in those countries where state banks are much less important, the spreads are also very high (see Table 3.5). In El Salvador, for example, spreads increased from around 2 per cent in the 1980s, to 4 or 5 per cent in the 1990s. And in Guatemala, spreads increased even more, rising from around 3 per cent in the 1980s to more than 10 per cent in the 1990s. The advocates of financial liberalization expect that, with the deregulation of interest rates, competition between banks will serve to promote greater efficiency, and thereby reduce spreads. In fact, however, there is evidence that in Central America the largest banks act as price leaders, establishing rates of interest that are then adopted by other smaller banks. In the case of Costa Rica, as indicated above, the stateowned Banco Nacional is recognized as the price leader.23 In El Salvador, on the other hand, the role of price leader is played by the two largest private banks, the Banco Agrícola Comercial and the Banco Cuscatlán.24 So, despite the relatively large number of banks in most of the countries, there are indications that competition in setting interest rates is limited, and that the largest banks play a preponderant role in their determination. A closely related factor, also concerned with the structure of the banking system, is the high concentration of loans to related companies. This has already been referred to in the case of private banks, but something similar has also occurred in relation to state banks, where many large loans were made on the basis of political connections, reflecting the close relation between business and government in the region. In Nicaragua, this led to a number of scandals in the early

44

Financial Liberalization and Banking

1990s involving the two principal state-owned banks and various wellknown individuals, including the Minister of Agriculture (Roberto Rondón, one of the largest cattle ranchers in the country), the president of the principal employers association (Ramiro Gurdián, who used a large sum intended for cultivating bananas for trading in bananas purchased in neighbouring Costa Rica), and the wife of the president of the Banco Nacional itself.25 A high proportion of loans by either private or state banks that were not made on sound commercial criteria can increase banks’ vulnerability, and this is exacerbated in the aftermath of financial liberalization, since, as a result of higher interest rates, more companies are unable to service their debts, and banks try to compensate for their losses by transferring the cost to other borrowers.26 A final factor concerning the high rate of interest is the importance of attracting foreign capital flows. Although the Costa Rican government has been attempting to promote lower interest rates, in reality all the countries are to some extent dependent on attracting inflows of private capital. Alongside financial liberalization, import duties have been dramatically lowered throughout the region as part of a policy of trade liberalization, and, as imports have risen faster than exports, the trade deficit of the Central American countries has increased sharply, rising from 1.7 billion dollars in 1990 to 4.0 billion dollars in 1995 (IMF, 1997). The deficit has been financed to a large extent by aid and loans from official international agencies, but inflows of private capital, particularly short-term private capital, have also played a part. The largest such flows occurred in Guatemala, where they amounted to some 500 million dollars a year between 1991 and 1993, and Costa Rica, where they were around 300 million dollars a year in 1992 and 1993.27 To some extent, however, there was an inflow of short-term private capital to all the countries in the 1990s, thereby reversing the dramatic outflow of capital that occurred at the beginning of the previous decade. According to central-bank and stock-exchange officials, capital that has been repatriated from abroad has been an important factor in the growth of the new security markets in the region, attracted by rates of return that are much higher than those available in Miami, combined with the relatively stable exchange-rate regimes.28 It is perhaps significant that the volume of such flows has declined since 1994, the year in which the Federal Reserve began to raise interest rates in the United States. At all events, the authorities in Central America are aware that a decline in local interest rates could lead to an outflow of capital, as occurred in Mexico at the end of 1994.

Trevor Evans 45

Savings One of the central arguments originally advanced in favour of financial liberalization was that it would encourage savings, and thereby increase the funds available to finance investment. This position has been widely criticized on both theoretical and empirical grounds, and is not even maintained today by Ronald McKinnon, one of the two original proponents of the strategy of financial liberalization.29 By contrast, an alternative approach, which stresses the importance of growth and national income in determining savings has recently been restated with considerable force by economists associated with the InterAmerican Development Bank (Gavin, Hausmann and Talvi, 1997). In the case of Central America, there is evidence that while strongly negative real interest rates in the 1980s were not conducive to saving, the effect of eliminating such negative rates in the 1990s has been mixed, and that where saving has increased, this is perhaps more associated with a resumption of economic growth. In much of the literature on financial liberalization, the ratio of liquidity (M2) to GDP is taken as an indicator of financial saving (for the case of Central America, see González and Poyo, 1989). Table 3.6 shows such ratios for Central America, averaged for groups of years between 1960 and 1995. From the figures it is possible to identify three distinct periods. First, there was a period of some 20 years, from 1960 to around 1980, in which the liquidity ratio increased steadily throughout the region, with the increase being especially marked in the 1970s. Second, in the 1980s, the countries begin to diverge, with the liquidity ratio either declining slightly, as in Costa Rica, El Salvador and Panama, or remaining relatively constant, as in Guatemala, and continuing to increase only in Honduras – significantly the country which was most successful in maintaining growth, due to the positive

Table 3.6 Liquidity (M2) as percentage of GDP 1960–64 1965–69 1970–74 1975–79 1980–84 1985–89 1990–92 1993–95 Costa Rica El Salvador Guatemala Honduras Nicaragua Panama

19.6 20.8 13.6 13.3 13.7 17.5

20.8 22.5 17.2 16.1 15.8 21.4

24.7 26.5 20.8 21.5 18.8 29.0

Source: Calculated from IMF (1997).

34.7 29.3 23.0 24.1 21.7 32.6

44.8 32.5 23.6 25.2 44.1 39.3

39.5 29.9 25.1 29.0 56.2 37.0

42.3 33.1 23.5 30.2 14.7 48.0

37.9 39.0 25.1 28.2 28.0 62.2

46

Financial Liberalization and Banking

economic impact of US aid and military expenditure. (The figures for Nicaragua in the 1980s are seriously distorted by the effects of very high inflation.) Third, in the 1990s, when financial liberalization programmes were introduced in most countries, the liquidity ratio increased in El Salvador, and, more notably, in Nicaragua and Panama. However, it remained roughly unchanged in Guatemala and Honduras, and actually fell in Costa Rica. In Honduras, it is true that real deposit rates registered strongly negative values in the 1990s, but this was not so in the case of Guatemala or Costa Rica. In fact, the use of the liquidity ratio as an indicator of saving has been widely questioned. Yilmaz Akyüz has pointed out that the function of a financial system is to intermediate between sectors with a financial surplus and those with a deficit, and not to transform global savings into global investment, and that changes in the liquidity ratio can occur independently of changes in real savings (Akyüz, 1993). There are no reliable figures for aggregate saving in the Central American economies, but a rough approximation of gross domestic saving was estimated from the national income accounts, taking the difference between GDP, private consumption and government consumption. Figures for the ratio of gross domestic saving to GDP are shown in Table 3.7, and here too it is possible to identify three distinct periods. First, the savings ratio increased in all the countries over the period from 1960 until the mid-1970s in Panama, and the late 1970s in the other countries – a broadly similar pattern to that of the liquidity ratio. In the 1980s, however, developments in different countries diverged considerably. In three countries, El Salvador, Guatemala and Nicaragua, the savings ratio registered a very notable decline throughout the period – perhaps significantly, these are the three countries that were directly involved in the armed conflicts. In Costa Rica and Panama, the savings ratio remained relatively constant in the 1980s,

Table 3.7 Gross saving as percentage of GDP 1960–64 1965–69 1970–74 1975–79 1980–84 1985–89 1990–92 1993–95 Costa Rica El Salvador Guatemala Honduras Nicaragua Panama

13.9 11.3 8.3 12.4 14.5 14.7

12.7 11.2 11.2 16.9 15.0 20.2

14.6 14.4 13.8 15.3 16.4 26.4

Source: Calculated from IMF (1997).

16.1 18.1 15.6 17.2 15.4 21.9

22.9 8.2 10.6 13.3 6.2 21.1

23.7 5.7 9.1 14.7 4.0 23.5

22.9 1.8 9.5 21.2 7.5 25.2

23.1 4.2 8.8 26.5 1.4 31.1

Trevor Evans 47

although with quite large fluctuations in the case of Panama. In Honduras, by contrast, while the savings ratio declined in the early 1980s, it then climbed steadily for the rest of the decade. Finally, in the 1990s, the savings ratio remained relatively constant in Costa Rica and Guatemala, increased slightly in El Salvador, and rose more significantly in Honduras, Panama and Nicaragua (where it was negative for much of the early 1990s). An examination of the countries where the savings rate increased most in the 1990s, does not, however, indicate a close relation between real interest rates and saving. In Nicaragua, although real deposit rates have been strongly positive since 1991, it is notable that the upturn in the savings ratio occurred some two years later, which coincides with the end of a decade of negative economic growth. In Honduras, where financial liberalization has been accompanied by a strong increase in the savings ratio, this occurred despite negative real deposit rates; furthermore, the increase has proceeded steadily since the mid-1980s, i.e. since before the introduction of liberalization policies, and appears to be more closely related to the country’s success in maintaining economic growth. And in the case of Panama, where the savings ratio also increased notably in the 1990s, the main features of financial liberalization have been in effect for many years, and here too, it seems likely that a decisive factor was the resumption of economic growth following the period of conflict with the US government in the late 1980s.

Investment One of the main claims that is made for financial liberalization programmes is that they will increase the finance available for investment, and ensure that such finance is allocated to projects with the highest rates of return. In Table 3.8, figures are presented for investment in fixed capital as a percentage of GDP. Once again it is possible to identify three quite distinct periods. First, from the early 1960s until the second half of the 1970s, the figures show that the investment ratio increased everywhere except Nicaragua, where, unfortunately, information is not available until the mid-1980s. Second, in the 1980s, the investment ratio declined everywhere. Finally, in the 1990s, the investment ratio increased everywhere except Costa Rica, where it remained relatively constant. Nevertheless, a striking feature of the figures is that they show the investment ratio in the 1990s to be lower than in the 1970s in every country except Honduras.30

48

Financial Liberalization and Banking

Table 3.8 Gross investment in fixed capital as percentage of GDP 1960–64 1965–69 1970–74 1975–79 1980–84 1985–89 1990–92 1993–95 Costa Rica El Salvador Guatemala Honduras Nicaragua Panama

17.3 12.7 10.3 13.1 — 16.2

17.8 13.4 13.1 16.1 — 19.1

21.9 15.1 13.5 17.4 — 28.0

23.4 20.7 18.8 22.1 — 26.0

21.3 12.6 13.7 19.3 — 23.8

19.4 12.9 12.1 15.6 20.7 13.4

21.0 15.3 13.6 20.5 19.4 14.0

20.8 18.6 15.0 27.4 24.4 24.2

Source: Calculated from IMF (1997).

The figures for investment in fixed capital do not indicate in which sectors the investment occurred. However, figures are available for the use of credit by economic activity, which make it possible to focus more directly on the role of the banking system in the financing of the economy (see Table 3.9). Between 1990 and 1995, the total value of new loans increased in every country except Nicaragua. There was, however, an important shift in the composition of the activities that received financing. First, the proportion of credit assigned to agriculture, cattle rearing and industry declined. The largest reductions occurred in Costa Rica (from 62 to 31 per cent), Guatemala (from 44 to 25 per cent), and Honduras (from 41 to 24 per cent), with a more moderate decline in Nicaragua (from 56 to 51 per cent). The exceptions were El Salvador, where the share of credit provided to industry increased slightly, and Panama, where there was a small increase in the share of credit to both agriculture and industry. Second, the proportion of credit assigned to commerce increased everywhere except in El Salvador. The largest increases were recorded in Costa Rica (from 17 to 27 per cent), Guatemala (from 29 to 36 per cent) and Honduras (from 36 to 49 per cent). The results indicate that there has been a notable change in the use of credit, with a shift from production activities to commerce.31 Commerce is, of course, one of the other sectors that has benefited from structural adjustment programmes, through the policy of trade liberalization, and, in particular, the reduction of tariffs on imported consumer goods. As a result, the commercial sector has flourished, and it is more able to afford the high rates of interest associated with financial liberalization. Nevertheless, trade liberalization has led to a growth of imports and an increase in the trade deficit of every country in the region, and, as noted above, the situation is only sustainable so long as

Trevor Evans 49 Table 3.9 Credit extended by banks in Central America, 1990–95 1990 Total new loans, $ millions Costa Rica 938.2 El Salvador 1,351.2 Guatemala 345.7 Honduras 816.9 Nicaragua 532.4 Panamaa 2,367.1

1991

950.0 1,524.3 535.0 1,038.8 468.6 3,349.7

1992

1993

1994

1995

1,486.6 1,923.7 738.5 1,304.5 523.5 4,813.9

1,774.5 2,176.3 652.8 1,069.4 465.9 5,325.6

1,928.2 2,168.8 968.7 436.4 543.1 13,421.8

1,655.3 2,512.6 1,114.7 1,323.8 496.2 5,387.9

Percentage of new loans for productive activities (agriculture, cattle rearing and industry) Costa Rica 62.5 60.6 48.1 37.0 32.9 31.4 El Salvador 30.8 38.3 44.5 40.8 37.7 31.5 Guatemala 44.5 38.7 34.1 25.2 27.0 24.9 Honduras 41.5 41.0 37.7 31.6 30.2 24.0 Nicaragua 56.1 60.7 66.7 60.2 55.1 50.6 Panamaa 13.9 10.4 8.5 8.2 4.4 8.9 Percentage of new loans for commercial activities Costa Rica 16.6 19.5 20.3 El Salvador 55.9 46.9 31.3 Guatemala 29.3 24.9 29.6 Honduras 36.2 39.4 35.9 Nicaragua 43.6 38.7 31.1 Panamaa 62.5 65.5 61.2

26.1 33.7 35.5 41.4 39.3 67.3

26.3 27.9 35.8 47.1 44.0 31.4

26.6 36.1 35.7 49.3 47.5 69.5

a

Only includes private, domestically owned banks; figures for 1995 are for January to September. Sources: CMCA (1996, 1997a), and Comisión Bancaria Nacional de Panamá (1995).

each country can continue to secure external financing, whether from official aid and loans or from private capital flows. The shift from financing production to commerce has meant that the demand for some forms of credit has not been met. One of the most important of these is the demand for credit by small producers, especially those in the countryside. The successful provision of credit to small agricultural producers in Central America has in the past depended principally on state-owned development banks, which were prepared to carry the costs of maintaining a network of local branches and of administering small loans. Throughout the region, however, such rural credit programmes have been cut back as a result of the pressure to close state banks, or to force them to function on the basis of strictly commercial criteria. There have been numerous local initiatives, mainly linked to non-governmental or religious organizations,

50

Financial Liberalization and Banking

which have established new non-conventional credit programmes – an approach which is also favoured at present by the World Bank and other international financial institutions. But while such schemes have been of great importance for the people who participate in them, they have been unable to substitute for the dramatic cutback in the provision of credit by development banks. In Nicaragua, where the contraction of credit to small producers has been most severe, the area covered by loans from the Banco Nacional for the production of maize and beans – the country’s two most important staple foods – fell from 207,000 manzanas in the 1990/91 agricultural cycle to a mere 10,900 manzanas in the 1995/96 cycle, a decline of 95 per cent (Banco Central de Nicaragua, 1996, table A6; a manzana is equal to 0.7 hectare). Another important weakness of the new financial model is that the credit that is available is largely short-term, and there is little provision for long-term credit, either for production or for the construction of housing. The official response to the lack of long-term finance has been to create second-tier banks, which extend lines of credit to commercial banks that are intended to finance investments in production, but this is something that is still in the process of being established, and is, in any case, largely dependent on securing lines of credit from abroad. In addition, it is envisaged that the newly created security markets should provide a channel for raising long-term capital for investment, but, as noted above, the issuing of private bonds and, above all, shares, has been very limited. And, in any case, this is obviously not a solution to the financing needs of the majority of medium- and smallscale producers in the region.

Conclusion As a result of the elimination of controls over interest rates, the banking sector in Central America has become very profitable, and there has been a notable increase in the number of banks. However, with few exceptions, the banks form part of powerful economic groups. In Costa Rica, Nicaragua and El Salvador where, at different points in time, the banks were nationalized, precisely in order to break up the power of economic groups, the process of privatization has resulted in a situation where most banks are once again controlled by economic groups based on a small number of wealthy families. Despite the proliferation of private banks, it is the largest ones that are most profitable, and it is likely that a process of rationalization will occur soon, so that the less profitable ones are either absorbed or closed.

Trevor Evans 51

The increase in interest rates, together with the control of inflation, has largely led to the elimination of strongly negative interest rates in the region. The deposit rate is, in real terms, generally around zero or slightly positive, except in Nicaragua, where it remains very high. But, while deposit rates are generally moderate, there has been a marked increase in bank spreads, and real lending rates are high in every country, and exceptionally so in Nicaragua. One important reason for such high rates appears to be the level of reserve requirements, which are frequently used to finance the fiscal deficit. Another significant reason is that, as a result of the structure of the banking system, the largest banks act as price leaders in setting the rate of interest. However, in Nicaragua, where real lending rates are by far the highest in the region, reserve requirements are not particularly high, although here monetary policy has been exceptionally restrictive. The impact of higher interest rates on saving, however, is ambiguous. In the 1980s, when real deposit rates were negative in most of the region, the financial savings ratio (M2/GDP) either declined or remained roughly constant, except in Honduras where it increased. In the 1990s, with the elimination of strongly negative deposit rates, financial savings registered a rise in three countries, but declined in one country where deposit rates were positive. The impact of higher interest rates on aggregate savings is also not clear-cut. In two countries, the saving ratio did not increase significantly, and in the four countries where it did increase, it seems likely that in three cases the most important factor was not so much the rate of interest, but rather economic growth. The proportion of GDP dedicated to investment increased throughout Central America in the first half of the 1990s. Nevertheless, in 1995 the investment ratio was still below the level reached in the 1970s in nearly every country – Honduras being the significant exception. In addition, an analysis of how credit has been assigned shows that there was a significant shift in the 1990s, with a notable decline in the proportion going to productive activities, and an increase in that for commerce. This study indicates that the expansion and profitability of the banking sector in Central America in the 1990s is linked to the growth in the proportion of credit that is assigned to the commercial sector. In fact, this is one of the few sectors where profitability is sufficiently high to pay the elevated rate of interest that banks charge for loans. However, the expansion and profitability of the commercial sector depends in important respects on the policy of trade liberalization, and

52

Financial Liberalization and Banking

is associated with an increased balance of payments deficit, and, as a result, the need to obtain external financing. In more general terms, the policy of financial liberalization has, by encouraging the expansion of the banking sector, led to the creation of significant new centres of private enrichment, while the closure and rationalization of state-owned development banks has reduced the access of many small and medium producers to credit. In this way, financial liberalization has contributed to the increased social polarization, which has been a marked feature of Central American countries in the 1990s.

Notes 1. I am grateful to Laurence Harris, Hansjorg Herr and the editors of this book for their comments on an earlier version of this chapter. 2. Central America is here taken to include the five members of the Central American Common Market (Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua) and Panama. Panama was least affected since it had already introduced many of the measures. 3. The first commercial bank in the region opened in Costa Rica in 1864 and the second in Guatemala in 1874. The first banks in El Salvador, Nicaragua and Honduras followed in 1880, 1887 and 1889 respectively (BulmerThomas, 1987). Panama has only existed as a separate state since 1903 and the first banks, which were US owned, opened in 1904 as part of the infrastructure associated with the construction of the canal. 4. Panama, of course, remains without a central bank, but the monetary constraints are absolute, due to the use of the dollar. In 1994, the finance minister of El Salvador suggested creating a currency board, which would have permanently locked the country’s currency to the dollar. But this was quietly abandoned after meeting widespread criticism, not least of all, from senior economists at the IMF and World Bank. 5. These are standardized norms for the region which were agreed in August 1995 by the members of the Central American Monetary Council, which includes all the countries of the region except Panama (García, 1996). 6. In Guatemala, the legalization of foreign currency accounts was unexpectedly blocked by the National Assembly in 1995, although in practice banks can in any case offer such accounts through their offshore affiliates. 7. For details of who controls the main banks, see Aguilar, 1993. 8. The largest of the new banks, the Banco de América Central, is owned principally by the Pellas and Chamorro families, who used to control the Banamérica group. Fifty per cent of the capital of the Banco de América Central is owned by BAC International, an offshore financial corporation registered in the Cayman Islands that was set up by the Banco de América in 1978 as the insurrectionary movement against Somoza was gaining force in Nicaragua. The second largest of the new banks, the Banco Mercantil, is led by the Montealegre family, which used to control the Banic group. Amongst

Trevor Evans 53

9. 10.

11.

12.

13. 14.

15. 16. 17. 18.

19.

20.

the other new banks, there are also two, the Banco de Finanzas and the Banco Intercontinental, that are based on capital that was accumulated in the 1980s by people associated with the Sandinista government (Velázquez, 1994). This was one of the conditions of the Enhanced Structural Adjustment Facility, agreed in June 1994. The Guatemalan central bank maintains a register of banks that form part of financial groups. For details, see Banco de Guatemala (1995). For details of links between banks and economic groups in Honduras before 1990, see Flores (1990). The Banco del País, founded in Honduras in 1993, is one of the very few new banks in the region that is not linked to a particular economic group. These figures do not include foreign banks, whose activities are largely concerned with external transactions. For details of banks in Panama, see KPMG (1995). Calculated from figures in Superintendencia del Sistema Financiera (1995), and Superintendencia de Bancos (1995). Reported figures for Costa Rica and Guatemala are not quite as high. But in both cases, some of the most profitable business is still channelled through offshore affiliates. Figures for profits are not published for Honduras. This was particularly the case in Nicaragua, where 5 of the 11 banks registered a loss in 1995. One has since been closed by the authorities. In El Salvador shares in the newly privatized banks, and in Nicaragua bonds issued to compensate property owners expropriated under the Sandinista government, played a significant role in launching the new exchanges in the two countries, and everywhere except Panama monetary instruments issued by the central bank as part of the shift to open market operations have played an important role. According to their Annual Reports, in 1995, the proportion of transactions involving state securities reached 89 per cent in Costa Rica; while the proportion of instruments with a maturity of less than three months rose to 82 per cent in Guatemala. The slight exception is Costa Rica, although even here shares only accounted for 2.1 per cent of transactions in 1995. For a more general discussion of the social and political importance of family groups in Central America, see Vilas (1995). Interview with Ian Walker, ESA Consultores, Tegucigalpa, 15 March 1996. Interview with Hector Dada, Director, FLACSO (Facultad Latinoamericana de Ciencias Sociales), 7 September 1995, and Alexander Segovia, former research director of CENITEC (Centro de Investigaciones Technológicas y Científicas), San Salvador, 5 September 1995. In Guatemala, all interest- and exchange-rate controls were eliminated at one swoop as part of a rather un-thought-out response to a foreign exchange crisis in 1989. The correlation coefficients between monthly figures for the deposit rate and the inflation rate in the three countries after liberalization were as follows: Costa Rica El Salvador Guatemala

(1989/1–1996/4) (1991/1–1996/4) (1990/1–1996/4)

0.68 0.64 0.81

54

Financial Liberalization and Banking

21. According to figures published by the Central American Monetary Council, between 1992 and 1996, net domestic credit expanded at a significantly lower rate than GDP in only two years in Costa Rica, one year in Honduras and no single year in El Salvador (CMCA, 1997a). 22. For a fuller account of this mechanism, see McKinnon (1993, pp. 55–65). 23. Interview with Ronald Chávez, Central Bank of Costa Rica, 13 December 1995. 24. Interview with Luz María Serpas de Portillo, Banco Central de Reserva, San Salvador, 6 September 1995. 25. For details of other cases, as made public by the bank workers’ union, see Rayo Valle (1996). According to official figures, 10 per cent of the Banco Nacional’s clients held 80 of the total amount of outstanding loans in 1994 (Superintendencia de Bancos de Nicaragua, 1995, p. 49). 26. This possibility is discussed by Akyüz, (1993, p. 15). 27. Short-term private capital plus errors and omissions from CMCA (1997b). In the case of both countries these flows were equal to around one-half of the trade deficit. 28. This is based on interviews conducted in each of the countries between September 1994 and March 1995. In Guatemala and El Salvador, exchange rates have been virtually constant, with a low risk of devaluation. 29. See McKinnon (1993, p. 22): ‘That aggregate saving, as measured in the GNP accounts, does not respond strongly to higher real interest rates is now well established; and cross-country statistical studies linking inflation rates to aggregate saving have also been quite ambiguous.’ For a review of the debates, see Akyüz (1993); for a summary of empirical studies, see González (1988). 30. The IMF’s figures for Nicaragua, which are in current prices, show fixed investment to be a much higher proportion of GDP than those published in constant prices by the Nicaraguan Central Bank (in 1995, 27.3 and 20.8 per cent, respectively). It is possible that by 1995 the investment was again at the level reached in the 1970s, but it should be noted that the recent increase in Nicaragua, which only began in 1994, was largely due to publicsector investment. (Banco Central de Nicaragua, 1995, table B2). 31. In the earlier years, credit programmes were still directed by the central bank in some countries, and credit assigned for production might in fact have been used for other purposes, in which case the shift in the share of credit going to commerce would be overstated. On the other hand, since the figures are for new credits, and do not therefore take account of credits that are being ‘rolled over’, which is more likely to affect agriculture and industry, the figures might understate the proportion of net new credits to commerce.

References Aguilar, Victor (1993) ‘El proceso de privatización en El Salvador’, Documento de Trabajo, Fundación Nacional para el Desarrollo, San Salvador, September. Akyüz, Yilmaz (1993) ‘Financial Liberalisation: The Key Issues’, UNCTAD Discussion Paper, No. 56, Geneva, March.

Trevor Evans 55 Banco Central de Honduras (1995): Boletín Estadístico, Tegucigalpa, December. Banco Central de Nicaragua (1996): Indicadores Económicos, Managua, January. Banco Central de Reserva de El Salvador (1994) Programa de Reformas del Sistema Fnanciero, San Salvador. Banco de Guatemala (1995) Banca Central, no. 27, Guatemala City, October– December. Bolsa de Valores de Panamá (1996) BVP en cifras, Panama City, January. Brenes, Lidiette (1990) La nacionalización bancaria en Costa Rica, San José: FLACSO. Bulmer-Thomas, Victor (1987) The Political Economy of Central America since 1920, Cambridge: Cambridge University Press. Cárdenas, Patricia (1996) ‘Panorama Bursátil’, Panorama Internacional, 1–15 April. Centro de Estudios Monetarios Latinoamericanos (CEMLA) (1981) Agrupación de bancos en el centro financiero internacional de Panamá, Mexico: CEMLA. Centro de Investigaciones Tecnológicas y Científicas (CENITEC) (1989) ‘El sistema financiero de Salvador, Análisis y perspectivas’, Cuadernos de Investigación, no. 2, San Salvador, May. Comisión Bancaria Nacional (1995) ‘Préstamos concedidos por el sistema Bancario Nacional, Años 1990–94 y enero a septiembre de 1995’, Panama, October. Comisión Económica para América Latina (CEPAL) (1995) El regionalismo abierto en América Central, Mexico: CEPAL, January. Consejo Monetario Centroamericano (CMCA) (1996) Boletín Estadístico 1995, San José: CMCA. Consejo Monetario Centroamericano (CMCA) (1997a) Boletín Estadístico 1996, San José: CMCA. Consejo Monetario Centroamericano (CMCA) (1997b) Situación económica de los países centroamericanos 1996, San José: CMCA. Danby, Colin (1995) ‘Challenge and Opportunities in El Salvador’s Financial Sector’, World Development, vol. 23. Enríquez, Laura and Rose Spalding (1987) ‘Banking Systems and Revolutionary Change: The Politics of Agricultural Credit in Nicaragua’, in Rose Spalding (ed.), The Political Economy of Revolutionary Nicaragua, London: Allen & Unwin. Flores Francisco, Mario (1990) El capital financiero en Honduras, Tesis de Maestría, Postgraduate Department of Development Economics and Planning, National Autonomous University of Honduras, Tegucigalpa. Galbis, Vicente (1986) ‘Financial Sector Liberalization under Oligopolistic Conditions and a Bank Holding Company Structure’, Savings and Development, vol. 10. García, Enrique (1996) ‘Desarrollos recientes de la integración financiera en Centroamérica’, Boletín Económico, no. 91, Banco Central de Reserva de El Salvador, January. Gavin, Michael, Ricardo Hausmann and Ernesto Talvi (1997) ‘Saving Behavior in Latin America: Overview and Policy Issues’, in Ricardo Hausmann and Helmut Reisen (eds.), Promoting Savings in Latin America, Paris: Inter-American Development Bank and OECD. González Arrieta, Gerardo (1988) ‘Interest Rates, Savings and Growth in LDCs: An Assessment of Recent Empirical Research’, World Development, vol. 16.

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González, Claudio and Jeffrey Poyo (1989) ‘Desarrollo financiero en Centroamérica’, in William Ascher and Ann Hubbard (eds), Recuperación y desarrollo en Centroamérica, San José. González, Claudio and Luis Mesalles (1993) ‘La economía política de la nacionalización bancaria’, in Claudio González and Thelmo Vargas (eds), Reforma financiera en Costa Rica, San José: Academia de Centroamérica. González, Claudio and Edna Camacho (eds) (1994): Regulación, competencia y eficiencia en la banca costarricense, San José: Academia de Centroamérica. Hughes, William and Iván Quintero (1987) Quienes son los dueños de Panamá?, Panama: CEASPA (Centro de Acción Social Panameña). International Monetary Fund (1997) International Financial Statistics, CD-ROM, June. KPMG Peat Marwick (1995) Balances de situación de bancos que operan en Panamá, Panama. McKinnon, Ronald (1993) The Order of Economic Liberalization, 2nd edn, Baltimore: Johns Hopkins University Press. Rayo Valle, Xavier (1996) ‘Nace frente pro BANADES’, Barricada, 11 October. Sojo, Carlos (1992) La mano visible del mercado: La asistencia de Estados Unidos al sector privado costarricense en la década de los ochenta, Managua: CRIES (Coordinadora Regional de Investigaciones Económicas y Sociales). Sojo, Carlos (1995) ‘En el nombre del padre: Patrimonialismo y democracia en Costa Rica’, in Manual Rojas and Carlos Sojo (eds), El malestar con la política, San José: FLACSO (Facultad Latinoamericana de Ciencias Sociales). Sorto, Francisco and Alexander Segovia (1992) ‘La reforma financiera de ARENA: Hacia dónde se dirige la privatización de la banca?’, Política Económica, vol. 1, no. 12, San Salvador. Superintendencia de Bancos, Guatemala (1997) Boletín Anual de Estadística del Sistema Financierio 1996, Guatemala. Superintendencia de Bancos de Nicaragua (1995) Informe Anual 1994, Managua. Superintendencia de Bancos de Nicaragua (1996) Informe Mensual December 1995, Managua. Superintendencia de Entidades Financieras, Costa Rica (1995) Boletín Financiero, San José, December. Superintendencia del Sistema Financiero, El Salvador (1995) Boletín Estadístico, San Salvador, December. Velázquez, José Luis (1994) Los nuevos grupos empresariales de Nicaragua, Managua: INCAE (Instituto Centroamericano para la Administración de Empresas). Vilas, Carlos (1995) ‘Redes de familia, democracia y modernización política en Centroamérica’, paper presented at the colloquium ‘Las elecciones en Nicaragua’, Managua, October. Wheelock, Jaime (1980) Nicaragua: Imperialismo y dictadura, Mexico: Siglo XXI.

4 Trade Reform in Central America and the Caribbean: Will Liberalization Resolve the Problem of Structural Imbalances? Rebecca Taylor and Andy Thorpe

Introduction Central America and the Caribbean have, during the 1980s and early 1990s, embraced neo-liberal development strategies in an attempt to transform their economic prospects, opening their economies to international competition and opportunity. As of yet the results are difficult to assess as short-term gains or losses often differ greatly from the medium to long-term effects. That said, it is important to examine the ongoing process of structural adjustment and identify how different countries are responding to the reform process. This chapter examines the specific contribution of trade liberalization to the emergence of sustainable growth models in Central America and the Caribbean.1 It commences by providing an overview of the standard neo-liberal arguments advanced in favour of trade liberalization, and then offers a brief résumé of historic development strategies, emphasizing the non-standard nature of the development experiences to date. The subsequent sections detail the evolution of trade policy (reforms) across the region, case studies of Costa Rica, Guatemala and Jamaica allowing us to identify the impact of trade policy reform upon growth rates and the trade balance at the national level. These findings are then placed within a regional context as we examine the extent to which local agreements (specifically CACM and CARICOM) are likely to influence the new trading environment. The conclusion notes that not only do current growth strategies appear to be unsustainable but, given that traditional exports still dominate in the export portfolio,

57

58

Trade Reform and Structural Imbalances

new trade regimes (NTR) may simply be acting to strengthen traditional comparative advantage as some authors suggest (Dijkstra, 1997).

Trade liberalization and neo-liberal theory Orthodox neo-liberal theory predicts that the elimination of trade barriers will offer a combination of static and dynamic gains, permit the introduction of new goods, new technologies, and new production methods, allowing the expansion of existing markets and penetration into new markets. Studies by Little, Scitovsky and Scott (1970), FitzGerald (1996) and Edwards (1992) indicate that excessive protectionism results in a misallocation of resources as tariff and non-tariff barriers increase the cost of imports, discriminate against exports through overvalued exchange rates, perpetuate a lack of investment opportunity, encourage little, or no, technological advancement and contribute to a deterioration in income distribution.2 Neo-liberal theory contends that trade liberalization will remove these distortions, reallocate resources on the basis of comparative advantage and thereby minimize waste, while inducing competition through a reduction in the prices of imported goods. A recent influential paper by Edwards (1992) appears to corroborate this, finding that more open economies have tended to experience faster rates of total factor productivity growth than those that restricted international trade. Trade liberalization measures can be more specifically decomposed into two sub-groups: measures which change the trade structure and measures which affect the exchange rate. Structural changes involve the reduction or elimination of tariffs, subsidies, quotas and all other non-tariff barriers. It also includes the conversion of specific tariffs to ad valorem tariffs (IADB, 1996). Liberalizing the foreign exchange market implies the removal of currency anchors and the unification of the exchange rate. The elimination of overvalued exchange rates will not only lead to an increase in the overall volume and diversity of exports ( Jepma and Rhoen, 1996) but will also reduce the likelihood of a dramatic growth in imports following the removal of tariff barriers (IADB, 1996). Other salient points that emerge in discussions regarding the requisites for successful trade liberalization relate to the speed at which liberalization takes place and the sequence of the changes involved. It was originally believed (Little, Scitovsky and Scott, 1970; Michaely,

Rebecca Taylor and Andy Thorpe 59

1985) that gradual transformation was preferable as it allowed time for economic restructuring in those sectors directly or indirectly affected by the liberalization process. The main argument leveled against a rapid reform was the fear that it would lead to increased unemployment. Current orthodoxy now appears to favour a rapid reform on two counts. First, a gradual reform allows those opposed to the policy – particularly with regard to tariff reductions – to challenge it at the decisionmaking level (World Bank, 1993). Second, a series of more recent studies (Michaely et al. 1991; World Bank, 1993) indicate that shortterm unemployment costs may well be negligible as the workers who lose their jobs are immediately re-employed by the large number of jobs created in the post-reform industrial expansion. A related issue concerns the ‘optimal’ sequencing of policy. While most economists emphasize the need for macroeconomic stabilization, there is disagreement as to whether stabilization policy should precede, or proceed simultaneously with, trade reform (Fischer, 1986; Wolf, 1986; Sachs, 1989; Edwards, 1989; Bhattacharya, 1997). There is a degree of consensus however over the need to postpone liberalization of the capital account so as to avoid the likelihood of a rapid capital inflow and a consequent appreciation of the real exchange rate (World Bank, 1993). Edwards (1984) has also insisted that a partial liberalization of the labour market is critical to the success of trade reform. On the sequencing of trade reform itself, Sheahan (1997), for example, has noted that domestic producers will benefit more when the introduction of export incentives precedes the dismantling of import barriers. If neo-liberal theorists are indeed correct then we would expect to see trade liberalization stimulating export growth at a rate that exceeds the historic rate, enhancing productivity, reducing unemployment and improving the trade balance. Obviously the degree of success will depend on the extent to which the trade reforms are implemented, the initial economic environment and the nature of complementary economic policies. The main point to note when analyzing the effects of trade liberalization, however, is that it takes several years for the full effect of the reforms to become apparent. Thus, one should beware of drawing conclusions too early as, while in the long run there may be a positive net effect, there may also be short-run costs that can be misinterpreted as evidence of policy failure. Furthermore, as there are likely to be some sectors or groups that lose out even in the long run, there is a need to balance sectoral losses against aggregate improvements.

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Trade Reform and Structural Imbalances

The historical pattern of Central American and Caribbean trade Central American trade relations exhibit a high degree of ‘openness’, historically export-driven, that is characteristic of small, low-income economies. While the nature of this openness has evolved over time, three distinct, albeit overlapping, export phases are evident in the period which preceded the imposition of neo-liberal trade regimes (NTRs) in the region. The most recent phase3 saw intra-regional trade emphasized as the Central American republics moved to establish the Central American Common Market (CACM) in December 1960. Capital inflows, in part stimulated by the Kennedy administration’s 1961 Alliance for Progress Program, flooded into the newly created CACM. It was meant to herald a Golden Age, rapid Import Substituting Industrialization (ISI) growth on a regional plane providing a sustainable development model which would propel CA out of agro-export dependency. The reality could not have been more different. The imposition of a high Common External Tariff (CET) on consumption goods did stimulate regional consumer good production but at the cost of reduced tax receipts (Cline, 1978: 510). While one response to the ensuing fiscal crisis, the San José Protocol (1968), introduced a supplementary import tariff, this simply hardened inward-looking, protectionist attitudes (Bulmer-Thomas, 1994: 281) and made the transition to an industrial-based, extra-regional export-led growth (XLG) even more improbable. The oil-price shocks of the mid-1970s effectively sounded the CACM’s death-knell, although the coup de grâce did not come until the early 1980s when Nicaragua defaulted on its outstanding debt with its CACM partners. While CA industrialists responded by concentrating production and/or petitioning for increased tariff protection, this failed to curb extra-regional imports, and the import bill climbed (Weeks, 1985: 149). The combination of the second oil-shock allied to the 29.7 per cent decline in the regional terms of trade between 1978 and 1981 plunged the region into a deep economic crisis. It appeared that ISI couldn’t rid the CA economies of the ups and downs associated with the traditional agro-export cycle, the boom of the 1960s and early 1970s becoming the bust of the 1980s. Could neo-liberal trade and economic policies do any better in CA in the 1980s? Although the majority of Caribbean countries share a common exporting past in the sense that sugar production predominated, a number of distinctive development paths emerged in the post-war

Rebecca Taylor and Andy Thorpe 61

period. The agro-export development strategy has remained most evident in Barbados, the Dominican Republic (sugar), Haiti (coffee) and the Windward Islands (bananas). By the beginning of the 1980s however the Caribbean agro-export economies were in crisis. Barbados sought International Monetary Fund (IMF) aid in 1982 after a combination of oil price increases and a collapse in raw-sugar prices caused its current account deficit to more than quadruple to $113 million between 1980 and 1981 (ECLAC, 1982: 15). The sugar price collapse saw the Dominican Republic turn to the IMF the same year. Haiti, too, despite a rapid growth in export processing zones, had little alternative but to resort to IMF funds as a depressed coffee market saw the country’s trade deficit escalate from $83 million to $207 million between 1980 and 1981. In Dominica and St Lucia, hurricanes David (in 1979) and Allen (in 1980) respectively decimated the agro-export sectors. A second strategy, adopted by Jamaica, Trinidad and Tobago and the Dutch Antilles, rested upon the development and subsequent exploitation (or refining) of mineral resources. In Jamaica’s case, bauxitealumina extraction had underpinned a 6.5 per cent per annum growth in GDP between the early 1950s and the 1970s (ECLAC, 1980: 552). However, export revenues declined as the transnational mining companies began to source the ore from new mines in Brazil, Australia and Guinea. Government failure to reverse the trend was a key factor in pushing the country into the arms of the IMF in 1976. The Trinidadian experience was a rather more successful one; the unprecedented rise in oil prices during the 1970s saw exports double, GDP grow at a rate of 7.6 per cent per annum between 1975 and 1980 and the merchandise terms of trade improve five-fold over the decade. However, the very success of the petro-development model also became the economy’s Achilles heel. By 1980 petroleum products accounted for 85.7 per cent of exports (ECLAC, 1980: 614) inextricably linking the nation’s destiny to movements in petroleum prices. A third strategy, ‘industrialization by invitation’, has its antecedents in Puerto Rico. Average growth rates reached 5–6 per cent per annum throughout the 1950s and 1960s as Puerto Rico became ‘the most important site of direct US investment in the whole of Latin America’ (Thomas, 1988: 80). When the US authorities responded by clamping down on Puerto Rico’s ‘favoured status’, US industrialists simply decamped to other Caribbean nations, most notably Haiti and the Dominican Republic. By the 1980s, although both these countries had significant export-processing zones in place, these zones were unable to provide a tangible palliative to the national agro-export crisis.

62

Trade Reform and Structural Imbalances

The final development strategy was service-based and sought to exploit the region’s natural advantages of a tropical climate, sandy beaches and a blue sea (tourism), or a secure location on the easternseaboard of the US time zone (offshore banking). At the beginning of the 1980s, tourist income was most important in Antigua (36 per cent of GDP), the US Virgin Islands (32 per cent), the Bahamas (23 per cent) and St. Lucia (19 per cent) with the Bahamas and Cayman Islands dominating on the banking front (Thomas, 1988: 157).4 It is clear, then, that there is no one historic development model within the CAC region. While the majority of economies adhere to the agro-export model, with bananas, coffee and sugar as the principal crops, Jamaica (bauxite/alumina) and Trinidad and Tobago (oil) exploited local mineral resource deposits to generate foreign exchange. In more recent years, some CAC economies have adopted development strategies based on tourism and/or off-shore banking, although only the smaller Caribbean economies have become over-dependent on the foreign-exchange-generating capabilities of such sectors.

Moving towards the new trade regime: liberalization in practice The process of trade reform in the CAC region is not a clear-cut one, on two counts. First, there is the question of identifying the point at which the transition to the NTR effectively commenced. Although trade liberalization is often the first element of the neo-liberal economic model introduced, the necessity of resolving spiralling trade deficits being paramount, there is no definitive consensus on starting dates.5 Our chapter elects to adopt the starting dates proposed by the Inter-American Development Bank (IADB) (Table 4.1). Table 4.1 Commencement of trade liberalization reforms in Central America and the Caribbean Country

Date

Country

Date

Costa Rica Guatemala El Salvador Honduras Nicaragua Panama

1986 1988 1989 1990 1991 1995

Jamaica Trinidad Dominican Republic Barbados Haiti Bahamas

1987 1989 1990 1992 1994 1996

Source: IADB (1996: 80).

Rebecca Taylor and Andy Thorpe 63

The second somewhat more problematic issue relates to the length of the transition process itself. Of the trade liberalizations implemented in the region to date, only those in Barbados, El Salvador and Haiti have been shock-type reforms (IADB, 1996: 85).6 Hence, given both the recent and gradual nature of the reform process across the region we are still some years away from being able to draw up a definitive cost– benefit account of the liberalization process. In the light of this, this section sets itself the task of delineating the (i) forex and (ii) tariff reforms undertaken in the region since the 1980s, indicating, where possible, the current state of play in the reform process, and (iii) identifying those other factors – both internal and external – which have sought to reorient the structure of CAC trade.

Forex reforms In the case of forex reforms, the general trend has been towards the unification and liberalization of the exchange rate and the removal of payment restrictions on merchandise imports/exports. Most countries still insist on the mandatory repatriation of foreign exchange earnings (Table 4.2). The reform process was not a smooth one. Experiments with multiple exchange rates and/or adjusted foreign-exchange payments mechanisms were common prior to the adoption of policies more consistent with the NTR advocated by the new economic model. In the Caribbean the continuing Jamaican crisis led the Seaga government to introduce a two-tier exchange-rate system in January 1983 with only essential imports entering at preferential rates. However, by the year-end the system had been abandoned. In its place the government instructed the central bank to set the official exchange rate on the basis of bi-weekly hard currency auctions. Favourable economic circumstances permitted the Jamaican dollar ( J$) to stabilize at around J$5.50US$1 until a 12.7 per cent decline in the terms of trade between 1988 and 1990 put the J$ under renewed pressure. In September 1991 Manley’s PNP administration relinquished all control over the exchange rate (IADB, 1993: 119). In Trinidad, while the oil price collapse prompted the tightening of exchange controls in October 1984, this failed to prevent a 33 per cent devaluation of the Trinidad dollar (TT$) the following year (LAC, 1985: 230, 1987: 205). Although the TT$ has remained relatively stable since, this did not prevent the Manning administration from floating the TT$ as part of its wider economic development strategy in early 1993. To date, the Barbadian and the Bahamian dollar have remained pegged to the US$.

64

Table 4.2 Exchange rate controls and restrictions in Central America and the Caribbean, 1979 and 1995 Central America Costa Rica 1979 Pegged to US$ Managed float Independent float Multiple rates Payment restrictions Forex repa. exports

1995

X

El Salvador 1979

Honduras

1995

X X

1979

1995

X X

Guatemala 1979

1995

X

Nicaragua 1979

1995

X

X

X X X X

X X

X

X

X

X

X

X

X

Panama 1979

1995

X

X

The Caribbean Bahamas

Pegged to US$ Managed float Independent float Multiple rates Payment restrictions Forex repa. exports

Barbados

Jamaica

1979

1995

1979

1995

1979

X

X

X

X

X

1995

Trinidad 1979

1995

X

Dominican Republic 1979

1995

X

Haiti 1979

1995

X X

X

X

X X X

X

X

X X

X

X

X X X

X

X

X

X

Source: IADB (1996: 102–3).

65

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Trade Reform and Structural Imbalances

Forex policy in the Dominican Republic was historically formulated on the premise that peso/US$ parity should be ‘officially’ maintained. To maintain parity the economically beleaguered Blanco government was obliged to sanction the emergence of a parallel rate in the early 1980s. This met with opposition from the IMF who pressed the Dominican Republic to follow Jamaica and unify rates. While the government rejected this, they did begin to price essential food imports at the parallel rate after international bankers withheld funds. Civil unrest ensued. Renewed IMF pressure in 1986 led to the termination of the two-tier exchange-rate regime and a 60 per cent devaluation of the peso. More devaluations followed in 1987 (45 per cent) and 1988 (31 per cent) and further civil disorder was only averted by the heavy subsidization of imported foodstuffs (LAC, 1989: 151). These subsidies were scaled down in the 1990s, with the government finally bowing to multilateral pressure and unifying the exchange rate in 1996. Haiti’s experience is an unusual one in the sense that forex market operations were complicated by the international trade embargo imposed following the September 1991 coup. Despite this coup, the country had switched over to a unified, freely floating, exchange-rate system before democracy was restored in 1994. In Central America, a wide divergence between the official and parallel rate led the government of Luis Monge to close Costa Rica’s forex bureaus in an effort to eliminate the black market (1982). When this failed the government resorted to a series of mini-devaluations. Widespread mini-devaluations became the order of the day as the colon slumped from CRc41.1 (1983) to CRc122.4 (1991) to the dollar before exchange controls were finally removed and the colon allowed to float in 1992. Honduras staved off devaluation during the 1980s thanks to the CETRAS scheme. Non-traditional, and subsequently traditional, exporters were permitted to retain a proportion of the product’s f.o.b. export value in hard currency thereby compensating for an overvalued exchange rate. The scheme was dropped in 1990 when the NTR, introduced by the Callejas government, halved the lempira’s dollar value. The country currently operates a managed float with the Central Bank allocating forex through fortnightly public auctions. While Guatemala had experimented with Stabilization Bonds7 in the early 1980s, these were substituted with a managed float by the end of the decade. Further liberalization in the 1990s saw exchange bureaus permitted to participate in the forex market (1991) and the quetzal being floated in March 1994. Nicaragua was the last to abandon multiple exchange rates. The distortionary nature of the forex regime during

Rebecca Taylor and Andy Thorpe 67

the Sandinista decade was softened during the Chamorro era, although a distinction between official and financial rates endured until early 1995. While exchange-rate liberalization has not been an issue in Panama given the widespread circulation of the US dollar, there are signs that El Salvador is moving away from a managed float in favour of an increased dollarization of the economy (IADB, 1995: 97). Tariff reforms The 1980s and 1990s witnessed the conversion of non-tariff barriers into tariff equivalents and the scaling-down of tariffs levied in the CAC region (Table 4.3). These moves, prompted by the Uruguay Round of the GATT, pressure from multilateral financial institutions and the resurrection of local free trade initiatives (CACM and CARICOM), have transformed the region into one of the most open in the world. Costa Rica has carried out one of the most extensive overhauls of trade legislation since the 136 per cent average tariff heyday of the early 1980s. Tariffs on food, drink and tobacco imports were cut from 259.3 per cent to 104.5 per cent in 1985, a move which reduced the average tariff to 91.6 per cent (Franco and Sojo, 1992: 44). In the

Table 4.3 Tariffs and non-tariff restrictions in Central America and the Caribbean, 1995 Central America Costa Rica

Average 11.7 tariff (%) NTBsb 0

El Honduras Guatemala Nicaragua Panamaa Salvador 9.2 11

17.9

10.8

17.4

37a

N/A

N/A

N/A

N/A

The Caribbean Bahamas Barbados Jamaica

Average 30 tariff (%) NTBsb N/A a b

11.8

12.5

5

0

Trinidad Dominican Republic

Haiti

15

17.8

10

5

0

N/A

The Panama figure is for 1996 and is from Latin American Monitor (1997: 2). Percent of imports subjected to non-tariff barriers.

Source: IADB (1996: 90).

68

Trade Reform and Structural Imbalances

IADB’s eyes, however, liberalization dates from the following year when the government capitulated to World Bank pressures and cut average tariffs to 22.3 per cent. Since then, trade policy has concentrated on homogenizing, and then steadily reducing, tariffs towards the Central American goal of a 20 per cent tariff ceiling on most imported goods (IADB, 1993: 72). In Nicaragua, 27.8 per cent of imports were affected by non-tariff barriers in the mid-1980s (World Bank, 1993: 59). By the early 1990s these had largely been eliminated. Furthermore, average import tariffs were down from 54 per cent to 17.4 per cent (1995) with the majority dispersed within the 10–32 per cent range (1997) (Aguilar, Stenman and Aguilar, 1996: 16). The May 1992 treaty eliminating almost all duties on commerce between El Salvador, Guatemala and Honduras was a major contributor to the process of regional tariff reduction. In the Salvadorian case, this was re-enforced by the streamlining of all remaining tariffs into the 5–20 per cent bracket in January 1995, leaving the country with the lowest average tariff in the region. Honduras significantly altered tariff structures in 1990, reducing the average import tariff by around 50 per cent and the dispersion by two-thirds (World Bank, 1994: 27). Tariffs were further reduced in 1992, this time to a range of 5–20 per cent, though 5–10 per cent import surcharges were levied until late 1994 (IMF, 1995: 31). Recent modifications in Guatemala have included the scrapping of import surtaxes and the reduction of maximum tariff rates from 37 per cent to 30 per cent (other regional imports) and 20 per cent (external, non-competing imports). In Panama the government instituted a liberalization programme in 1993 by eliminating non-tariff restrictions and replacing specific tariffs with ad valorem duties. Rates remained well above the Central American average, however, until a series of radical reforms catapulted the Panamanian average tariff down to 8.25 per cent, the lowest in the region, in late 1997 (Latin American Monitor, Central America, 1997: 2). In the Caribbean region, both Haiti and Barbados introduced shocktype reforms. The Barbadian average tariff rate fell to 11.8 per cent (from around 70 per cent) and the majority of non-tariff restrictions were removed in the first half of the 1990s. In the case of Haiti, an initial bout of liberalization in the mid-1980s was reversed in 1989 as import tariffs were raised to satisfy fiscal objectives and ease currency pressures (LAC, 1987: 384, 1989: 431). They remained high until 1994 when, under the new civilian government’s 1994 Emergency Economic Recovery Programme, the average tariff fell to 10 per cent, the import valuation system was modified and quantitative restrictions were eliminated

Rebecca Taylor and Andy Thorpe 69

(IADB, 1995: 115). Trinidad had introduced strict import controls, including the licensing of imports from fellow CARICOM (Caribbean Common Market) members, in response to falling oil revenues during the early 1980s. As the economic crisis grew, controls became progressively tighter until, at the behest of the World Bank, Trinidad restructured its tariff legislation in 1992. Import surcharges (10–25 per cent) replaced non-tariff restrictions for all but a few items and a tariff ceiling (including surcharges) of 100 per cent was introduced (IADB, 1993: 169). Surcharges were phased out by 1995 as Trinidad aligned itself with CARICOM plans for a maximum 20 per cent common external tariff (CET) by 1998. Jamaica adopted a similar strategy, formulating its tariff reform programme in line with CARICOM recommendations. In the Dominican Republic, the beleaguered Balaguer government had raised import tariffs and eliminated tariff-exemptions (maquilas excepted) in 1987. Although trade levies grew 65 per cent, the measures failed to cure the fiscal deficit (ECLAC, 1989: 602ff). The fiscal importance of trade taxes in the Dominican Republic however, a 1990 adjustment programme notwithstanding, has ensured that the pace of liberalization has been somewhat slower than in the rest of the region. External and internal trade-enhancing measures The most important external influence upon CAC trading patterns was the Reagan administration’s 1983 Caribbean Basin Initiative (CBI). Conceived as a mini-Marshall Plan (Thorndike, 1987: 15), it sought to ensure regional political stability through the provision of increased aid and greater market access for non-traditional exports. Unfortunately petroleum and petroleum derivatives, textiles and clothing, footwear and leather goods, and traditional exports such as sugar and bananas were excluded from the original deal,8 as were Nicaragua (until the early 1990s) and Cuba on political grounds. In the case of sugar, externally determined policies have not been so favourable to the region in recent years. While US quotas offered substantial rewards in the early 1980s, growing US beet production saw the CAC quota decline to such an extent that a number of authors concluded that the policy was imposing a net cost on the region by the end of the decade (Borrell and Duncan, 1990: 7). A somewhat more beneficial external decision – at least for the countries concerned – saw Haiti and the Dominican Republic granted ACP status under the Lomé Convention in 1989, although in the case of Haiti this benefit was diminished by the international sanctions imposed between 1991 and 1994. Finally, at a regional level, the renewal of interest in common markets has

70

Trade Reform and Structural Imbalances

facilitated the growth of intra-regional trade through the simplification of trade procedures, the conclusion of trade agreements and the elimination of tariff barriers and trade restrictions. Internal reforms have also played their part in supporting the new export-oriented agenda. The most visible of these has been the creation of export processing zones (zona francas or libres) or free-ports. Legislation such as the 1985 Régimen de Importación Temporal in Honduras suspended import/export taxes and offered a series of other incentives for enterprises producing within specially designated zones. Such zones have proliferated throughout the region. Lundahl (this volume) suggests that as many as 175,000 Dominicans and 45,000 Hondurans may work in such zones. The Latin American Monitor (Caribbean, 1997: 1) estimates that 45,000 Jamaicans are employed in just the apparel for re-export sector. Recent legislation has also given a boost to non-traditional agricultural export production, particularly in Central America. Laws such as El Salvador’s 1986 Ley Fomento de Exportaciones have, by granting tax exemptions and production subsidies, encouraged the production of pineapples, melons, snowpeas, cultivated shrimp, ornamental plants and cut flowers, amongst others, for export (de la Ossa and Alonso, 1990: 26ff). Traditional exports have not been excluded from the export drive; Honduras offered export tax breaks to the banana companies via La Ley de Incentivos a la Producción Bananera in May 1991 (Thorpe, 1996: 228) and Jamaica halved its bauxite levy in 1989 (LAC, 1989: 162). Finally, USAID have helped underpin the exportled growth strategy, funding new national export promotion agencies such as FIDE (Honduras), CINDE (Costa Rica) and FUSADES (El Salvador). It is clear, then, that the NTRs adopted in the CAC region are radically different from the old. Exchange-rate controls and restrictions have been swept away and with it – in neo-liberal eyes – the antiexport bias. Tariff reforms, by reducing one of the principal barriers to trade, have prompted import growth. There is a very real short-term danger, however, that trade deficits will increase if imports escalate yet traditional export supply response is sluggish. This is particularly problematic when the incremental imports simply satiate the previously repressed demand for consumer goods. In instances where the import growth reflects an increased demand for capital goods, however, such inward investment may well re-enforce the export diversification programmes being promoted across the region and help narrow (or eliminate) the trade deficit in the longer-term. Unravelling the impact of

Rebecca Taylor and Andy Thorpe 71

trade liberalization is imperative then if the issue of structural (im)balances is to be addressed.

The new trade regime: outcomes Trade liberalization programmes can be assessed by two principal methods: first, in terms of their impact upon specific trade variables, most notably merchandise imports and exports and, by definition, the trade balance (Table 4.4); second, with respect to how these changes translate into improved economic growth and/or reduced inequality for the countries concerned.9 This chapter concentrates on the first of these issues (the income distribution aspect is addressed elsewhere in this volume). A number of outcomes are clearly apparent. First, the liberalization process has accentuated the openness of the regional economies, most notably in the case of Costa Rica and Jamaica (the first adjusters). Second, although GDP growth rates cannot be solely explained by economic policy changes, it is nevertheless noticeable that post-reform rates are significantly higher in the CA region, Honduras excepted. The picture is less clear in the Caribbean context, where declining staple export prices or production volumes (oil in Trinidad, sugar in Barbados and the Dominican Republic) have incided negatively on post-reform growth rates. Third, trade imbalances remain as export growth rates have either (i) undershot import growth rates and/or (ii) been insufficiently robust as to erase the underlying deficit. The only exception is Trinidad & Tobago which has posted a three-year average post-liberalization trade surplus of US$741 million due largely to exploitation of its oil wealth. The extent to which these outcomes can be attributable to trade liberalization processes can only be clearly ascertained by reference to the ‘local’ national environment however. The most appropriate points of reference for such a case-study approach are Costa Rica, Jamaica and Guatemala. Costa Rica, Puerto Rico excluded, is the furthest down the ‘industrialization by invitation’ road in the region. Jamaica and Guatemala, by contrast, despite attempting to diversify exports, still remain strongly wedded to bauxite-alumina (Jamaica) and agro-export (Guatemala) growth-based models. As these three countries were also the first to adopt adjustment programmes within the region, it is here that we would expect to encounter the first fruits of the liberalization process.

72

Table 4.4 Pre- and post-trade reform performance of the Central American and Caribbean economies Central America

Exportsa Importsa Trade balanceb Opennessc GDPa

Costa Rica

El Salvador

Honduras

Guatemala

Nicaragua

Panama

5.5/9.8 5.9/11.3 33/143 58/84 2.8/4.4

3.3/17.0 3.1/15.7 276/756 46/54 0.1/4.1

4.1/9.3 2.0/10.4 24/137 54/54 4.4/2.7

2.6/8.7 11.1/7.1 68/339 39/42 2.2/3.9

2.4/14.3 3.0/10.7 316/457 50/58 1.9/1.9

12.1/5.9 10.4/9.6 725/N/A 63/N/A 3.5/2.5

Trinidad

Dominican Republic

Haiti

The Caribbean Bahamas Exportsa Importsa Trade balanceb Opennessc GDPa

4.2/N/A 5.7/N/A 867/N/A 92/N/A 0.8/N/A

Barbados 5.2/11.9 1.4/5.9 466/378 119/89 7.0/0.8

Jamaica 4.3/10.2 9.2/12.9 339/495 79/111 2.6/2.8

5.0/8.6 13.4/13.2 294/741 64/62 3.7/1.4

3.4/0.3 7.8/8.0 879/1430 77/97 3.6/2.3

Note: The number before the slash is pre-reform performance while the number after the slash is post-reform performance. a Percentage rate of growth per annum. b 3-year averages, millions of dollar. c Defined as the sum of imports plus exports as share of GDP. Source: Calculations from IADB (1993, 1997).

5.4/6.7 0.9/51.3 153/333 48/74 2.0/0.2

Rebecca Taylor and Andy Thorpe 73

Costa Rica Costa Rica, with a 1995 per capita income of $2,590, lies at the upper end of the lower-middle-income group of countries and is viewed as one of the ‘most stable and robust democracies’ in the region (World Bank, 1997). Although its macroeconomic stabilization and adjustment programmes date from 1982, moves to liberalize trade are generally dated to 1986. Cuts in import tariffs were matched with export tax reductions, US$0.30 per box subsidies for bananas produced on newly cultivated land, a CATs (Certificados de Abono Tributario) scheme which offered tax-rebates to non-traditional exporters, and an expansion of designated zonas francas. ‘Export contracts’ between government and exporters also offered a plethora of incentives, although the fiscal consequences of the scheme saw its rationalization in 1991/2 (Dijkstra and van der Wijk, 1996: 200). Response was somewhat lagged, however, and it was not until the 1990s that export production surged ahead (Figure 4.1). Although export earnings of traditionals grew by 57.4 per cent in the 1990s, bananas displacing coffee as Costa Rica’s principal commodity export on the strength of contrasting global price trends for the two crops, the most significant growth was in the non-traditional sector (Table 4.5). Here, exports grew by 131 per cent over the same period, the biggest percentage rise being recorded in the food industry sector (up 348 per cent).

Millions of Dollars

3500 3000 2500 2000 1500 1000 500 1982

1984

1986

1988 Year Exports

Figure 4.1 Trade balance, Costa Rica

1990

1992

Imports

1994

1996

74

Trade Reform and Structural Imbalances

Table 4.5 Structure of Costa Rican exports, 1970–96 (in % of exports except as indicated) 1970

1980

1990

1996

1996a

Coffee Bananas Meat/livestock Sugar Traditional

31.6 28.9 7.8 4.4 73.5

24.7 20.7 7.1 4.1 57.0

17.9 23.1 3.4 2.4 48.7

14.2 21.5 1.5 1.7 39.3

378.8 575.9 40.3 44.4 1,049.3

Agriculture Food industry Industry Nontraditional

N/A N/A N/A 26.5

N/A N/A N/A 43.0

15.0 3.7 32.7 51.3

23.5 10.1 27.1 60.7

629 270.5 724.1 1,623.5

Total

100

100

100

100

2,672.8

a

Millions of US$.

Sources: ECLAC (1983); Procomer (1997).

This has been complemented by an increase in exports (not included in the merchandise statistics) originating from the zonas francas, up from US$7 million (1986) to US$791 million (1997)10 as Costa Rica has partly embraced the ‘industrialization by invitation’ model. The rapidity of this growth – Costa Rica is now the second largest cotton and synthetic fibre underwear exporter to the US, for example – has already provoked retaliatory US action in March 1995 (CACR, 29 Feb. 1996). An important aspect of the zona franca strategy is its employmentcreating potential. Employment in the zona francas rose from 2,000 to 26,000 between 1986 and 1997,11 a growth that has important consequences for national poverty and inequality levels (Sojo, this volume). This improved export performance in the post-reform period has been reflected in markedly higher economic growth rates (Table 4.4). However, there are a number of inherent structural weaknesses in the current Costa Rican model. First, despite the inroads made by the ‘industrialization by invitation’ model, the country remains essentially an agro-export economy, earnings from its two main export crops (35.7 per cent of total export revenues) now being supplemented with newer non-traditional agricultural exports (23.5 per cent).12 Second, while post-reform export growth has been strong, it has nevertheless been modest when compared to import growth (11.3 per cent p.a.). This import growth, triggered by a combination of reduced tariffs, improved equality and a local appetite for imported US products (US Embassy, 1998a), has seen the deficit on merchandise trade widen significantly

Rebecca Taylor and Andy Thorpe 75

since 1988 (Figure 4.1). While this gap has historically been plugged by growing tourism revenues – tourism now being the country’s major export earner – and increased foreign direct investment, it is unlikely that these sources could sustain future imbalances of this magnitude. There is already some evidence that Costa Rica is a victim of its own success: (i) low unemployment rates have driven wages up, causing some maquila enterprises to relocate to Nicaragua where labour supply is less constrained, and (ii) the exponential growth of eco-tourism ventures have led to fears that the country’s ‘carrying-capacity’ may already have been exceeded (US Embassy, 1998a). Furthermore, the detrimental impact of NAFTA (North American Free Trade Association) on Costa Rican textile and clothing exports to the US was already evident by 1995 (ECLAC, 1995: 186). Third, the dismantling of import tariffs and export taxes, and their replacement with CATs and other export-promotion schemes – allied to the increased social expenditures nodded-through on the eve of the 1994 elections – left the government with a fiscal deficit approaching 6.6 per cent of GDP. The incoming government’s immediate response was to unilaterally raise import tariffs by 8 per cent in March 1995. While this increase was subsequently rescinded, the fiscal straitjacket casts doubt upon the extent to which the government can continue to underwrite export-promotion schemes, a point made abundantly clear with the winding-up of the CATs scheme in 1996. If this proves to be the case, and exports falter, the prospect of closing a trade deficit already exceeding 7.4 per cent of GDP (IADB, 1997: 276) without incurring severe economic and social adjustment costs is extremely remote. Guatemala The restoration of civilian rule in early 1986 coincided with the adoption of an IMF-approved economic adjustment programme. While an integral part of this programme, dated by the IADB to 1988, was the deregulation of trade and the liberalization of the exchange rate, three further factors were instrumental in reorienting the economy towards external markets. First, the Ley de Fomento y Desarrollo de la Actividad Exportadora y de Maquila (Decreto 29-89) amplified earlier legislation, incorporating other potential exporters – most notably non-traditional agricultural producers – simplifying customs procedures and providing a more appropriate regulatory climate. Interestingly enough, as Decreto 29-89 does not stipulate that qualifying companies must be located within designated zones, Guatemalan export-processing activities are more dispersed than in the other Central American republics.13

76

Trade Reform and Structural Imbalances

Second, USAID underwrote the establishment/operations of a number of empresarial export-oriented pressure groups who formulated new exporting strategies and/or lobbied for greater government support.14 Finally, the efforts of Key-Sung Cho, the South Korean Ambassador to Guatemala from 1988 to 1990, resulted in substantial inward maquila investment by Korean entrepreneurs.15 The consolidation of the maquiladora sector is the principal reason for the dramatic, albeit lagged, 8.7 per cent export growth in the postreform period (Table 4.4). The sector, which employs an estimated 80,000 workers, has seen export revenues climb 314 per cent since the start of the 1990s and Guatemalan non-traditionals (maquila and manufactured goods) now outsell Argentine, Chilean and Peruvian manufactures in the US market (US Embassy, 1998b; and US Dept of Commerce, cited by GEXPRONT, 1998). Even so, as ‘invited’ industrial exports form a smaller proportion of the export portfolio than in Costa Rica, the most industrialized of the Central American republics, the country’s trading prospects remain dependent on the performance of its traditional agricultural exports. In aggregate terms, premium grade coffee remains the country’s chief export although the recent restructuring of the sugar industry has sharply improved its export prospects. Non-traditional fruit and vegetable exports have also grown as producers have become more cognizant of US fitosanitary regulations and

Table 4.6 Structure of Guatemalan exports, 1970–96 (in % of exports except as indicated) 1970

1980

1990

1996

1996a

Coffee Bananas Cotton Meat/livestock Sugar Traditional

33.9 6.9 8.9 4.3 3.1 N/A

30.5 3.0 10.9 1.9 4.5 N/A

26.1 7.1 2.1 2.6 12.6 N/A

32.2 7.7 N/A N/A 13.8 59.0

654.5 156.5 N/A N/A 280.6 1,197.7

Agriculture Clothing/textiles Industry Nontraditional

N/A N/A N/A N/A

N/A N/A N/A N/A

9.0 5.6 3.3 24.3

14.4 13.8 8.9 41.0

292.0 280.1 179.9 932.3

Total

100

100

100

100

2,672.8

a

Millions of US$. Note: Clothing/textiles includes maquiladora operations.

Sources: ECLAC (1983, 1992); GEXPRONT (1998).

Rebecca Taylor and Andy Thorpe 77

Millions of Dollars

3500 3000 2500 2000 1500 1000 500 1982

1984

1986

1988 Year Exports

1990

1992

1994

1996

Imports

Figure 4.2 Trade balance, Guatemala

market requirements, and cultivated shrimp exports, growing at a rate of 18 per cent per annum, currently generate US$27 million of foreign exchange (GEXPRONT, 1998) (Figure 4.2). While export growth has overshadowed import growth, contributing to an improved 3.9 per cent post-reform growth rate (Table 4.4), it has nevertheless failed to make significant inroads into a deficit on merchandise trade which has stabilized at around US$1,000 million since 1992 – this, despite coffee revenues having risen substantially from a 1992 low of US$239.6 million to gross US$654.5 million in 1996. To date, the sharp exchange-rate depreciation such a large trade deficit would normally entail has been avoided thanks to (i) tourism receipts – which generate a surplus of around US$250 million p.a.; (ii) family remittances – estimated at US$350 million per annum; and (iii) large private capital inflows (GEXPRONT, 1998; US Embassy, 1998b; IADB, 1997: 280). Herein, then, lies the underlying weakness of the Guatemalan model: the combination of a large trade deficit and the unpredictability of future capital flows casts serious doubts upon the strategy’s worth as a long-term development blueprint. Jamaica In the Jamaican case, while pre- and post-reform GDP growth rates have not significantly changed (2.6 per cent as compared with 2.8 per cent), the same cannot be said of exports or imports. Since liberalization commenced in 1987 total exports have grown at a rate of 10.1 per cent

78

Trade Reform and Structural Imbalances

per annum, compared with an average 4.3 per cent decline in the immediate pre-reform period. Yet, with import growth being more pronounced (12.9 per cent per annum compared with the pre-reform rate of 9.1 per cent), the trade deficit has widened to US$1,263 million (Figure 4.3). The main exports remain alumina, bauxite, sugar and bananas (Table 4.7). Recent trends in bauxite-alumina production have not only been extremely volatile but also largely independent of trade liberalization measures; the reopening of Alumina Partners of Jamaica, a 50 per cent cut in the production levy and the sale of 100,000 tons of alumina to China (LAC, 1989) saw mining output leap 35.6 per cent in 1989. In the early 1990s production temporarily tailed off as local bauxite/alumina producers exchanged short-term output growth for capacity expansion with a view to generating more secure long-run returns. The policy was reaping dividends by the mid-1990s as the industry posted growth rates of 6–8 per cent per annum. It is now a combination of bauxite/alumina and the tourism industry – which currently generates 71.8 per cent (US$1.1 billion) of service sector income and accounts for 1 in 4 jobs – that accounts for 77 per cent of the country’s foreign exchange earnings (CACR, 23 Sept. 1997; US Embassy, 1998c). Current economic policies aim to encourage foreign investment, generate employment and promote the use of local raw materials

Millions of Dollars

3000 2500 2000 1500 1000 500 1982

1984

1986

1988 Year Exports

Figure 4.3 Trade balance, Jamaica

1990

1992

Imports

1994

1996

Rebecca Taylor and Andy Thorpe 79 Table 4.7 Structure of Jamaican exports, 1970–95 (in % of exports except as indicated) 1995

1995a

63.7b

49.2b

704.2b

7.4 3.2 77.6

6.7 3.3 64.1

95.9 48.2 916.2

8 11

N/A 19

N/A 32.5

N/A 464.3

100

100

100

1,429

1970

1980

Bauxite Alumina Sugar Bananas Traditional

27 40 11 4 87

21 57 6 1 89

Manufactures Nontraditional

8 13 100

Total a b

1990

Millions of US$. Bauxite and alumina combined.

Sources: ECLAC (1983); US Embassy (1998c).

through a plethora of incentives which include continued participation in free trade zones and preferential trade arrangements. Primary economic preoccupations in the 1990s related to (i) the impact of NAFTA upon Jamaican clothing, footwear and textile exports to the US; (ii) the high consumer goods component of current imports – in 1996 consumer goods imports rose 12 per cent while capital goods imports fell 7.3 per cent (CACR, 18 Feb. 1997); and (iii) the effect that moves toward the single European Market will have on the EU’s current trade agreements with Jamaica. Under Lomé, Jamaica has enjoyed special access arrangements for important agricultural exports such as bananas and sugar. Withdrawal of these privileges, in particular the ending of the EU banana agreement, could spell disaster for Jamaican banana producers. Future trade prosperity in Jamaica appears to lie in sustained growth of tourism, manufacturing and agriculture although the eventual contribution that each of these sectors will make to GDP is, as yet, uncertain. However, a major constraint on the Jamaican economy in the post-reform period remains the foreign debt ($3.6 billion), a debt which requires annual servicing payments that consume in the region of 17 per cent of GDP. At present, however, growing unemployment (currently 16.3 per cent), inflation, depreciation of the Jamaican dollar and labour unrest are all contributing to the economic problems that threaten the country’s ongoing stability despite the potential for growth and modernization.

80

Trade Reform and Structural Imbalances

The rise of regional integration: CACM, CARICOM and the new trading environment The revival of the Central American Common Market (CACM), coupled with the recent changes in the Caribbean Common Market (CARICOM), have reopened the potential for trade gains through a process of greater regional integration. After the crises of the 1980s – world recession, adjustment and stabilization programmes, political and civil conflict – during which all hopes of a highly developed intraregional network were dashed, the move towards the re-establishment of the CACM became reality with the signing of the Sistema de Integración Centroamericana (SICA) in 1991 and of the Protocol of Guatemala in 1993 (Bulmer-Thomas, 1998). A key issue of the new CACM accord is the introduction of a Common External Tariff (CET) with a ceiling of 20 per cent and a goal to successively reduce this to 15 per cent (Bulmer-Thomas, 1998). CARICOM have also made similar positive steps to lower the CET to 20 per cent by the end of 1998 despite the many challenges, most recently the uncertainty over the trade agreements dealing with EU banana imports, and the expiry of the special trade concessions received under the Lomé agreement (2000) (IADB, 1997). The revival of commitment to the common market and the external tariff is best illustrated by examining the current direction of CAC internal trade (Table 4.8). Between 1990 and 1993 Central American intra-regional exports increased from 15.2 per cent to 22.8 per cent of total exports, falling back to 19.2 per cent by 1995. Intra-regional imports had also fallen to less than 15 per cent of total imports (Bulmer-Thomas, 1998). A discussion of intra-regional trade growth in the CACM is best addressed by splitting agriculture and manufacturing and examining their respective roles in boosting the development of a strong, mutually reliant network. The 1960s/70s CACM model had sought to develop a strong

Table 4.8 Intra-regional exports as per cent of total exports, 1985–95

CACM CARICOM

1985

1990

1995

15.5 N/A

15.2 12.4

19.2 16.2

Source: Bulmer-Thomas (1998).

Rebecca Taylor and Andy Thorpe 81

intra-regional market in manufactured goods, although the protective measures employed created a falsely competitive, trade-diverting trade zone. This trade-diversion culture had many negative effects on the region. Primarily the loss of revenue from both protective tariffs and the decreased volume (due to the now excluded cheaper imports) meant that the positive effects of intra-regional trade growth were often outweighed by longer-term negative fiscal consequences (CACR, 7 Nov. 1996). By the 1990s and the new commitment to intra-regional trade, intra-regional exports were still dominated by manufacturing industry while trade in agriculture continued to lag behind, despite the clear competitive advantage of the countries involved (BulmerThomas, 1998). The main spin-off from this growth in intra-regional trade is an increase in extra-regional exports of manufactured goods which implies that CACM members may be slowly moving out of the protective web and learning to compete with global economies. The CARICOM countries aimed towards more open trade relations during the 1990s but lack of foreign exchange due to protective ISI strategies has continued to make them overdependent upon exports. Intra-regional trade, too, has been somewhat successful, growing from approximately 10–16.2 per cent of total trade between 1990 and 1997 (CACR, 15 July 1997, 31 Mar. 1998). However, market structures and a lack of strength in the area of industrial activity has meant that there is little scope for building closer relations with each other. The continued surpluses declared by Trinidad & Tobago on intra-regional trading deals has also caused friction, most noticeably in 1996 when Jamaica and Barbados imposed non-tariff restrictions on imports of Trinidadian electrical goods and pasta (CACR, 25 July 1996). As in the case of the CACM, the CARICOM countries have also found the combination of the overprotection of the 1980s and the current lack of fiscal revenue (due to the lowering of CET) crippling to their long-term growth prospects (CACR, 15 July 1997). Further concerns are apparent in the area of labour mobility: a characteristic that is essential for the development of a true common market and strong intra-regional trade. First, Costa Rica’s hesitation to agree to such measures has stalled progress towards a more strongly integrated market (Bulmer-Thomas, 1998). Second, there is concern over the viability of the CACM and the CARICOM once the integration process extends to encompass other free trade agreements. Costa Rica (in 1995) and more recently Nicaragua (Latin American Monitor, January 1998) have signed free trade agreements with Mexico and their efforts towards joining NAFTA will inevitably jeopardize policies such

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as the enforcement of the CET by the CACM. CARICOM too has expressed its desire to ally with NAFTA in order to protect its access to the critical North American market (CACR, 7 Nov. 1996). The future of regional integration in Central America and the Caribbean is generally seen with optimism. Whether these regions will truly succeed or not in their drive to grow through intra-regional trade is yet to be determined. What is certain, however, is that in order for them to see any marked return on their trade efforts there must be greater emphasis on structural reforms in order to boost their lagging productive capacity (Echeverria and Chocano, 1993). With a greater degree of diversification there may come a strengthening of individual economies and, in the longer term, stronger trade relations with the integration of other economic communities.

Conclusion It is clear that the CAC economies have taken significant steps down the trade liberalization path. The recentness of the reform process, however, precludes a definitive assessment of the NTRs’ likely impact upon long-term growth and future trade trajectories. But in the short-term, export performance (Dominican Republic excepted) and growth (Honduras, Barbados, Trinidad and the Dominican Republic excepted) in the post-reform era has generally shown an improvement over pre-reform trends. Some export diversification has taken place, although trade dependency on a small portfolio of export commodities is likely to remain for the foreseeable future. Preliminary evidence also suggests that trade liberalization has had a positive distributional effect; the elimination of non-tariff restrictions has removed the rents enjoyed by local producers and importers and this, in conjunction with reduced tariff schedules, has offered the opportunity – not always accepted – to reduce the price of mass consumer goods, although this thesis is examined in more detail in Sojo (this volume). Increased openness has come at a price, however, and the majority of countries (El Salvador, Guatemala, Nicaragua and Barbados excepted) have seen imports grow at a faster rate than exports – with a concomitant effect upon the trade deficit/surplus. By 1996 all the major CAC economies, with the exception of oil-rich Trinidad and Tobago, were registering larger trade deficits (as a percentage of GDP) than a decade earlier (IADB, 1996 and 1997). Yet, despite these burgeoning deficits, most of the regional economies have maintained a measure of currency

Rebecca Taylor and Andy Thorpe 83

stability thanks to compensating increases in tourist revenues and/or capital inflows attracted by the new investment climate. The question is: How sustainable are these deficits given the acknowledged volatility of capital inflows and the fragility of tourism revenues? In a sense, growing short-term deficits are no bad thing – and are perhaps inevitable – if imports are being deployed in broadening and/or strengthening the export base. The problem arises when this import growth relates to consumer goods, as opposed to capital goods, as in the 1996 Jamaican case. In these latter instances continued trade imbalances remain dependent upon equilibrating foreign exchange injections, whether in the guise of capital inflows or tourism revenues. However, an over-reliance upon tourism income or capital flows to finance trade deficits is a dangerous game – as recent events in Egypt (Luxor) and SouthEast Asia have shown – and can quickly be undermined. Recognition of this vulnerability has prompted a renewed interest in regional trading blocks within the CAC region. Yet, a new CACM or CARICOM is unlikely to provide a substantive avenue for export expansion as we have shown, and so eyes have been cast northwards. While the Bush administration granted the CBI an indefinite lifespan in 1990, the exclusion of innumerable commodities reduces its worth to the CAC economies, more so since the NAFTA deal.16 Unfortunately, then, we would surmise that there is every indication that the current development model will founder in the CAC region in the longer term through the failure of the NTRs to resolve these underlying trade deficits.17

Notes 1. Cuba is excluded from our frame of reference on the grounds that it has not yet been obliged to adopt neo-liberal trade liberalization reforms. 2. These views are by no means shared by all. Rodrik (1995), FitzGerald (1996) and Dijkstra (1997) amongst others have raised a series of critical objections to neo-liberal trade orthodoxy. While recognizing the validity of such critiques, space dictates that this section limits itself to outlining the salient aspects of the orthodox view – orthodox failings are detailed in a later section. 3. The earlier phases cover the periods 1870 to late 1940s (when the region was incorporated into world trade circuits as banana and/or coffee exporters) and late 1940s to mid-1960s (when attempts were made to diversify the export crop portfolio). Interested readers are directed to the classic text by BulmerThomas (1994) for a comprehensive overview of development in the region. 4. While trade liberalization can affect tourism levels, principally through exchange-rate devaluations, this chapter will henceforth focus solely on merchandise trade.

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5. Jamaica and Costa Rica, for example, had both replaced currency pegs with a (more flexible) managed exchange-rate float following deals with the IMF in the early 1980s. The IADB (1996) however dates the transitions from 1986 (Costa Rica) and 1987 ( Jamaica). 6. A ‘shock’ reform is defined by the IADB as one that (i) cuts average tariff levels by 50 per cent or more, (ii) eliminates the majority of non-tariff restrictions, and (iii) leaves the average tariff rate under 20 per cent within the space of two years. 7. Importers were required to purchase a specified volume of Stabilization Bonds (five-year dollar bonds with a 12 per cent coupon rate) from the Central Bank within 10 days of filing a forex request. These were then passed over to suppliers in settlement, ‘since there is practically no other way to do business’ (LAC, 1985: 102). 8. Jamaican lobbying led the US to subsequently extend the deal to encompass assembled garments – where the clothing had been both manufactured and cut in the US – under Section 807 of the US federal tariff code in 1986. This new ruling was the main explanatory factor behind the 1.7 per cent growth in Caribbean exports to the US over the period 1985–92 according to Maingot (1994: 188). Improved Mexican access to US markets following the NAFTA deal has since reduced these benefits. 9. The IADB (1997: 52) suggest that while structural reforms have increased Latin America’s rate of growth by 2.3 per cent in recent years, over half of this was directly attributable to trade reforms. The same report also concludes that trade reforms have had a generally favourable impact on income distribution in the region. 10. These figures should be treated with caution as the true value-added in Costa Rica is much less. In 1997 for example, as US$596 million of imports (also not included in the merchandise trade figures) was re-exported in the recorded US$791 million of exports the net balance on transactions was US$195 million. In some years, this balance has been negative (1993US$21.8 million, 1994US$8.3 million) (Procomer, 1997). 11. These Procomer figures are substantially less than the 70,000 quoted by the US Embassy (1998) as being employed in the country’s textile and electronic component maquilas. 12. Inclusion of net export earnings (value added) in 1996 (US$130 million from exports of US$643 million) from the zona franca region, while reducing these percentages to 34.1 per cent (coffee and bananas) and 22.4 per cent (non-traditional agricultural exports), would not invalidate the characterization of the economy as an agro-export one. 13. The country has only two industrial parks (‘ZOLIC’ at Puerto Santo Tomas de Castilla on the Atlantic Coast and ‘Grupo Zeta’ in Palin, near Guatemala City). Most maquila factories are currently located in Guatemala City, although a skilled and abundant labour supply is turning the Central Highlands into a viable alternative (GEXPRONT, 1998). 14. These include: the Guatemalan Chamber of Commerce (Cámara Empresarial de Guatemala, CAEM) in 1981, an advisory council on exports (El Consejo Nacional de Promoción de Exportaciones, CONAPEX) in 1987 and the Association of Non-Traditional Exporters (Gremial de Exportadores de Productos No Tradicionales, GEXPRONT) (AVANCSO, 1994: 33/4).

Rebecca Taylor and Andy Thorpe 85 15. In 1987 there were four Korean enterprises in Guatemala. Four years later their numbers had grown to 53 (AVANCSO, 1994: 36ff). 16. Attempts to persuade the US Congress to approve a Caribbean Basin Parity Bill, giving Caribbean goods the same access rights to the US market as Mexican goods, failed in September 1995. 17. The scenario is particularly bleak for the Caribbean economies in the light of Lomé retention in a modified form and strong pressures are currently being exerted through the World Trade Organization to end the region’s preferential access to European Union banana markets.

References Aguilar, R., A. Stenman and J. Aguilar (1996) Nicaragua 1995: A New Door Might be Opened, Stockholm: Sida. AVANCSO (1994) ‘El Significado de la Maquila en Guatemala: Elementos para su Comprehensión’, Cuadernos de Investigación, no. 10. Bhattacharya, R. (1997) ‘Pace, Sequencing and Credibility of Structural Reforms’, World Development, vol. 25. Borrell, B. and R. C. Duncan (1990) A Survey of the Costs of World Sugar Policies, World Bank, International Economics Department WPS 522, Washington, DC: World Bank. Bulmer-Thomas, V. (1994) The Political Economy of Central America Since 1920, Cambridge: Cambridge University Press. Bulmer-Thomas, V. (1998) ‘The Central American Common Market: From Closed to Open Regionalism’, World Development, vol. 26. Central America and the Caribbean Review (CACR), Various Issues, Latin American Newsletters. Cline, W. R. (1978) ‘Benefits and Costs of Economic Integration in Central America’, in W. Cline and E. Delgado (eds), Economic Integration in Central America, Washington, DC: Brookings Institution. de la Ossa, A. and E. Alonso (1990) Exportaciones No Tradicionales en Centroamérica , Cuadernos de Ciencias Sociales No. 31, San José: FLACSO. Dijkstra, A. G. (1997) Trade Liberalisation and Industrial Development: Theory and Evidence from Latin America, Working Paper No. 255, The Hague: Institute of Social Studies. Dijkstra, A. G. and J. van der Wijk (1996) ‘Export Promotion in Costa Rica’, in R. Buitelaar and P. van Dijck (eds), Latin America’s New Insertion in the World Economy, Basingstoke: Macmillan. Echeverria, C. M. and L. A. Chocano (1993) ‘The New Direction of Integration in Central America’, available at http://www.usis.usemb.se/ERT/e09/CENT3.HTML ECLAC (Economic Commission for Latin America and the Caribbean) (1980) ‘The Economic Development of Jamaica and Trinidad and Tobago in the 1970s’, Economic Survey of Latin America and the Caribbean, Santiago: UN-ECLAC. ECLAC (1982) ‘Introduction’, Economic Survey of Latin America and the Caribbean, Santiago: UN-ECLAC.

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ECLAC (1983) ‘Evolution of the Caribbean Economies’, Economic Survey of Latin America and the Caribbean, Santiago: UN-ECLAC. ECLAC (1989) ‘Dominican Republic’, Economic Survey of Latin America and the Caribbean, Santiago: UN-ECLAC. ECLAC (1992) ‘Guatemala’, Economic Survey of Latin Amrica and the Carribbean, Santiago: ECLAC. ECLAC (1995) ‘Economic Trends in the Caribbean’, Economic Survey of Latin America and the Caribbean, Santiago: UN-ECLAC. Edwards, S. (1984) ‘The Order of Liberalization of the External Sector in Developing Countries’, Princeton Essays in International Finance, no. 156, Princeton, NJ: Princeton University. Edwards, S. (1989) On the Sequencing of Structural Reforms, NBER Working Paper No. 3138. Edwards, S. (1992) ‘Trade Orientations, Distortions and Growth in Developing Countries’, Journal of Development Economics, vol. 39. Fischer, S. (1986) ‘Issues in Medium-Term Macroeconomic Adjustment’, World Bank Research Observer, vol. 1. FitzGerald, E. V. K. (1996) ‘The New Trade Regime, Macroeconomic Behaviour and Income Distribution in Latin America’, in V. Bulmer-Thomas (ed.), The New Economic Model and its Impact on Poverty and Income Distribution in Latin America, London: ILAS/Macmillan. Franco, E. and C. Sojo (1992) Gobierno, Empresarios y Políticas de Ajuste, San José: FLACSO. GEXPRONT (1998) Internet site: www.quetzalnet.com/gexpront IADB (1993) Report on Economic and Social Progress in Latin America, Washington, DC: Inter-American Development Bank. IADB (1995) Report on Economic and Social Progress in Latin America, Washington, DC: Inter-American Development Bank. IADB (1996) Report on Economic and Social Progress in Latin America, Washington, DC: Inter-American Development Bank. IADB (1997) Report on Economic and Social Progress in Latin America, Washington, DC: Inter-American Development Bank. IMF (1995) Honduras – Recent Economic Developments, IMF Staff Country Report No. 95/19, Washington, DC: IMF. Jepma, C. J. and A. P. Rhoen (eds) (1996) International Trade, London: Addison Wesley Longman. LAC (1985) Latin America and the Caribbean Review, Saffron Walden: World of Information. LAC (1987) Latin America and the Caribbean Review, Saffron Walden: World of Information. LAC (1989) Latin America and the Caribbean Review, Saffron Walden: World of Information. Latin American Monitor (1997) Caribbean and Central American Issues, vol 14. Little, I., T. Scitovsky and M. Scott (1970) Industry and Trade in Some Developing Countries, Oxford: Oxford University Press. Lundahl, M. (2001) ‘Sustained Growth in Haiti: Pipe-Dream or Realistic Possibility?’ (this volume) Maingot, A. P. (1994) The United States and the Caribbean, Basingstoke: Macmillan.

Rebecca Taylor and Andy Thorpe 87 Michaely, M. (1985) ‘The Demand for Protection Against Exports of Newly Industrialized Countries’, Journal of Policy Making, vol. 7. Michaely, M., Choksi, A. and Papageorgiou, D. (eds) (1991) Liberalizing Foreign Trade, New York: Blackwell. Procomer (1997) Internet site: www.procomer.com/español/estadísticas/actualizadas. Rodrik, D. (1995) ‘Trade and Industrial Policy Reform’, in J. Behrman and T. N. Srinivasan (eds), Handbook of Development Economics: Volume IIIB, Oxford: Elsevier. Sachs, J. D (1989) ‘Conditionality, Debt Relief and the Developing Country Debt Crisis’, in J. D. Sachs (ed.), Developing Country Debt and Economic Performance: Volume I: The International Finance System, Chicago, IL: University of Chicago Press. Sheahan, J. (1997) ‘Effects of Liberalization Programs on Poverty and Inequality: Chile, Mexico, and Peru’, Latin American Research Review, vol. 32. Thomas, C. Y. (1988) The Poor and the Powerless: Economic Policy and Change in the Caribbean, London: Latin American Bureau. Thorndike, T. (1987) ‘The CBI and CARICOM – Complementary or Contradictory?’, Latin America and the Caribbean Review, Saffron Walden: World of Information. Thorpe, A. T. (1996) ‘Honduras: Hybrid NEM’s and Poverty’, in V. BulmerThomas (ed.), The New Economic Model and its Impact on Poverty and Income Distribution in Latin America , London: ILAS/Macmillan. US Embassy (1998a) Costa Rica: Country Commercial Guide, San José: US Embassy. US Embassy (1998b) Guatemala: Country Commercial Guide, Guatemala City: US Embassy. US Embassy (1998c) Jamaica: Country Commercial Guide, Kingston: US Embassy. Weeks, J. (1985) The Economies of Central America, New York, NY: Holmes & Meier. Wolf, M. (1986) ‘Timing and Sequencing of Trade Liberalisation in Developing Countries’, Asian Development Review, vol. 4. World Bank (1993) A Decade after the Debt Crisis, Washington, DC: World Bank. World Bank (1994) Honduras: Country Economic Memorandum/Poverty Assessment, Washington, DC: World Bank. World Bank (1997) Costa Rica: Country Overview, available at www.worldbank. org/html/extdr/offrep/lac/costaric.htm.

5 Economic Reform, Citizenship and Social Integration in Central America Carlos Sojo

Introduction This chapter analyzes the dynamics of social integration in three Central American countries during the 1990s: Costa Rica, Honduras and Nicaragua.1 In this period, all three countries carried out economic reforms. Agreements with the International Financial Institutions (IFIs) led to reduced state intervention; in general, traditional policies for macroeconomic stabilization were combined with policies to reduce and rationalize the state. But the reforms were carried out with different speed and with different intensity.2 The aim of this chapter is to investigate the contradictory tendencies of an economic growth model that is based on increased international integration but that, at the same time, hampers the possibilities for internal social integration. In their illuminating article, Bustelo and Minujin (1997: 132) use the concepts of exclusion and inclusion in order to understand social integration problems. They define political inclusion or exclusion as referring to formal citizenship, and it is related to political rights such as elections. Economic inclusion is related to ‘the extent of integration with the open – economy model’, while social integration refers to ‘aspects of social capital of families and community, access to health, education, social security and family income, among other things’. With respect to economic and social integration, the population can be divided into three different layers: the included, the vulnerable and the excluded. The interesting aspect of the exclusion theory is that it allows the combination of social, economic and political indicators to assess the dynamics of social integration. It does not produce a dichotomy of inclusion vs. exclusion, but rather an opportunity to grasp the dynamics 88

Carlos Sojo 89

of the exclusion process. For this reason, we apply the exclusion levels identified by Bustelo and Minujin – inclusion, vulnerability and exclusion – for an assessment of ‘substantive’ citizenship in Central America.3 We believe that the exclusion theory provides a good methodological tool for grasping the idea of citizenship. The first section examines the impact of international openness and international integration on sectoral changes in economic activity, and in leading social groups that manage these changes. These changes reflect the uneven growth of the different sectors. The second section deals with the dynamics of poverty, understood as ‘deficits’ in social citizenship. The starting point is the poverty estimates derived from a combination of the ‘poverty line’ (PL) method with the assessment of ‘unsatisfied basic needs’ (UBN). The third section contains an appraisal of the integration possibilities derived from the labour market. We think the labour market provides a link between civic citizenship and possibilities for social citizenship. In the fourth section, we therefore propose a methodology to link the dynamics of production with that of poverty. Since employment is crucial for income and for social stability in the long and medium term, we believe that an assessment of labour market dynamics in an exclusion framework allows us to predict the socio–economic integration possibilities of the current growth model. In order to analyze the dynamics of civic citizenship, we examine the transformations undergone by the production structure and the manner in which these changes, induced by the opening process, define a new pattern of economic integration. Secondly, we examine the poverty indicators as expressions of the development of social citizenship. Finally, we analyze the evolution of the labour market as an indication of the problematic link between the deficits of social citizenship and the problems caused by the open economic model. Our aim is to present the tension between, on the one hand, the progress in economic rights produced by growth in more and more liberalized economies (i.e. with reduced regulating capacity of the state), and on the other, the integration possibilities via the extension of social rights.

Production transformations and their social impact The countries studied generate a large portion of their production in the agricultural sector: a fifth in Costa Rica, a fourth in Honduras and nearly a third in Nicaragua. In spite of the relative importance of this sector, growth has been faster in other sectors such as trade and financial

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services. The annual growth rate of the commercial and financial sectors exceeded the average growth rate of total GDP between 1990 and 1995 in all three countries, except for financial services in Nicaragua. As a result, the contribution of trade and financial services to GDP has risen, while the contribution of industry and agriculture remains stable or may even decrease. This pattern is most manifest in Costa Rica, the country with the longest experience in economic reform. The contribution of the commercial sector to GDP has increased by two percentage points, and that of financial services by three percentage points, while industry and agriculture have remained stable and the government decreased its contribution to GDP by nearly two percentage points between 1981 and 1995. Honduras shows a similar increase in the contribution of financial services between 1981 and 1995, but the commercial sector has remained stable in the last decade after a fall of three percentage points in the first five years of the 1980s. In Nicaragua, the contribution to GDP of the commercial and financial services has remained stable, industry decreased and agricultural and livestock activities have expanded their share by 3 percentage points (see Tables 5.1–5.3). The greater dynamism of commerce and finance has important social effects, for example, because the sectors are highly concentrated. In Costa Rica, 40 per cent of the banking business in 1995 was in the hands of three large private banks (Sojo, 1995). Nicaragua moved from a state bank monopoly in 1990 to a situation with eleven private banks in 1996, which together allocated 60 per cent of the new credits. In Honduras, the private bank sector has existed for a longer period and operates without competition from the state. It is highly concentrated. Another concentration indicator is the relatively low employment generation capacity of the banking sector against the high salaries paid. In Nicaragua, it has been shown that the banks have the lowest employment contribution out of twelve economic sectors, while they pay the highest wages (Ghysels, 1995). The banking sector serves as a financial platform for the activities of the most powerful economic groups in the region. Banking is not an isolated business; it is intimately related to the commercial and productive businesses. The new economic ‘powers’ of the countries are settled through the banks and the extensions and links with other productive activities. In this sense, even in the midst of a productive reform that stimulates new exports, the groups linked to financial capital have more possibilities to grow, to actively respond to the demands of foreign markets, and, as a result, to increasingly exert political influence.

Carlos Sojo 91 Table 5.1 Costa Rica: GDP composition by sector, constant prices (percentage composition and variation) (a) Percentage

GDP Agriculture Industry Commerce Financial enterprises General gov’t Other

1981

1985

1990

1991

1992

1993

1994

1995

100 19 22 16 5

100 19 22 17 6

100 19 21 17 7

100 20 21 16 7

100 19 22 17 8

100 19 22 17 8

100 18 22 17 8

100 19 22 18 8

10 26

10 26

9 27

9 27

8 26

8 27

8 27

8 27

(b) Variation

GDP Agriculture Industry Commerce Financial enterprises General gov’t Other

1991

1992

1993

1994

1995

1990–95

2.3 6.3 2.1 0.2 1.2

7.7 4.0 0.3 12.5 10.8

6.3 2.4 6.4 7.5 12.4

4.5 3.2 3.5 5.0 7.0

2.5 3.3 3.2 3.0 1.0

4.7 3.8 5.1 5.6 6.5

1.0 1.5

1.0 6.9

2.0 8.1

2.5 5.8

2.5 1.6

1.8 4.8

Source: Consejo Monetario Centroamericano (CMCA) (Central American Monetary Council) (1990, 1997).

The socio-productive implications of this process are also reflected in the sectoral distribution of credit. The expansion of certain activities and not of others is mainly induced by the operations of financial markets. In this sense, the general orientation of the region is towards decreasing the funding for high-risk activities, particularly the agricultural and livestock activities, and towards concentrating resources in activities with a fast return and high profit rates (see Evans, this volume). The trends in exports are also important in relation to the transformations experienced by the Central American countries studied in this chapter. The current development model shares with the former export substitution experiences the faith in exports as instruments of development. All countries have developed policy instruments for fostering the expansion of non-traditional exports. The results indicate that the contribution of traditional exports to total exports fell between 1991 and 1996. They now represent less than half in the case of Costa Rica

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Table 5.2 Honduras: GDP composition by sector, constant prices (percentage composition and variation) (a) Percentage

GDP Agriculture Industry Commerce Financial enterprises General gov’t Other

1981

1985

1990

1991

1992

1993

1994

1995

100 25 13 14 5

100 25 13 11 5

100 25 14 10 6

100 26 14 10 7

100 25 14 9 7

100 23 14 10 8

100 24 14 10 8

100 25 13 10 8

4 38

4 42

6 40

5 39

5 40

6 40

5 40

4 40

(b) Variation

GDP Agriculture Industry Commerce Financial enterprises General gov’t Other

1991

1992

1993

3.3 6.1 1.7 2.2 9.6

5.7 3.6 6.1 2.9 9.5

6.2 0.6 6.3 8.1 11.7

3.8 2.2

3.9 7.0

14.8 8.0

1994

1995

1990–95

1.5 0.8 1.8 1.2 5.8

3.6 6.9 2.6 4.3 6.3

3.5 3.4 3.0 3.8 8.6

16.5 2.6

9.7 2.8

2.2 3.5

Source: CMCA (1990, 1997).

and Nicaragua, and they decreased from 77 per cent to 58 per cent in Honduras. This points to a significant transformation of the export sector and, therefore, of its capacity for political incidence and influence. It seems that the relatively concentrated oligarchic and transnational agro-export model gives way to a more diversified production structure and therefore also to more different social actors. This could be the counterpart of the concentration produced by the expansion of the highly concentrated commercial and financial businesses. In Costa Rica, the number of enterprises increased from 23 to 227 between 1980 and 1990 in the Régimen de Admisión Temporal (Temporary Admission Regime), and from 11 to 96 between 1986 and 1991 in the Régimen de Zona Franca (Free Trade Zone Regime) (Pérez Sáinz,1996: 166). Nevertheless, there is some evidence that the diversification of products does not necessarily lead to less concentration in production. In Costa Rica, for example, most of the exporting enterprises are registered under the Export Contract (Contrato de Exportaciones), a system

Carlos Sojo 93 Table 5.3 Nicaragua: GDP composition by sector, constant prices (percentage composition and variation) (a) Percentage

GDP Agriculture Industry Commerce Financial enterprises General gov’t Other

1981

1985

1990

1991

1992

1993

1994

1995

100 24 25 19 3

100 24 26 17 3

100 25 23 17 3

100 24 24 18 3

100 24 23 18 3

100 25 23 18 3

100 27 23 18 3

100 27 22 18 3

9 20

12 18

13 19

11 19

11 20

11 20

10 20

9 20

(b) Variation

GDP Agriculture Industry Commerce Financial enterprises General gov’t Other

1991

1992

1993

1994

1995

1990–95

0.2 3.9 6.2 4.9 1.9

0.4 3.1 4.6 1.4 0.0

0.4 1.8 0.1 2.3 1.4

3.3 10.8 0.7 1.6 1.4

4.2 5.0 3.2 4.8 3.0

1.5 3.3 1.1 2.1 0.2

12.5 1.1

0.1 2.7

1.8 0.8

5.5 3.9

1.8 6.8

4.3 2.7

Source: CMCA (1997).

of fiscal incentives for non – traditional exporters, which led to extremely high fiscal expenditures for the Costa Rican state (MIDEPLAN, 1997). Apart from the high costs, there have been several allegations on the degree of concentration of the incentives, which in turn reflects that the generation of foreign exchange through the production of tradable commodities is a highly concentrated activity. In some cases, it is also de-linked from the domestic economy, as it comes about with foreign capital in free-trade zones. In 1989, 13 per cent of the exporting enterprises benefiting from the fiscal incentive took 50 per cent of the total amount, and one multinational company dedicated to the export of pineapples monopolized 11 per cent of the subsidy (Franco and Sojo, 1992). In short, the development of new activities generating foreign exchange has brought about important social transformations; the social outlook has become more complex although not more equitable. The traditional oligarchic structure could be losing ground to a new

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heterogeneous business community composed of traditional businessmen, new businessmen from the services sector, a financial group, which is becoming more and more powerful, and a heterogeneous community of owners of foreign businesses and executives of transnational corporations. In this respect, it is possible that the newly exporting businessmen and the new elite of managers and top officials of the transnational companies could become the counterpart of the professional groups that developed under the protection of the state and of the manufacturers of middle-sized companies that flourished in the framework of the regional integration process.4 Examining the employment trends in these occupational categories in Costa Rica, we observe an expansion of high – level activities: the categories of professionals and technicians, employers, businessmen, executives and directors of state companies, went from 2.4 per cent of the working population in 1987 to 4 per cent in 1995 (Vega et al., 1996). According to official figures, the occupational category of ‘employers and active partners’ registered the highest growth between 1990 and 1996 (from 5.3 per cent to 7 per cent), while the share of ‘own account workers’ and ‘unpaid family workers’ decreased, and the wage workers category increased from 70 per cent to 71.2 per cent (MIDEPLAN, 1997). Thus, an economically affluent sector is created (Galbraith) with a standard of living that exceeds by far the ability of generating income and consumption of the rest of the population.5 This consumption capacity feeds the expanding circuit of commercial activities and allows the development of a leisure culture that has been identified as the arrival of modernity. This development has also acquired a regional dimension. For the first time since the start of the efforts to create a regional common market, regional businesses are mushrooming: for example, financial companies with a regional focus; shopping centres of Salvadoran capital in various countries; an airline that covers the whole region. The transnationalization of Central American capital is also an expression of the integration process of the elite, and of a significant enrichment of part of the population. The contrast with the situation of the rest of the population is reflected in the indicators for the distribution of income. The average income of the first decile was 30 times that of the tenth decile in Honduras in 1992. The World Bank estimated the improvement in the distribution of income at 6 percentage points of the Gini coefficient between 1960 and 1993 (Del Cid and Kruijt, 1997). In Nicaragua, the relation between the first and the fifth quintile is estimated at 35 times

Carlos Sojo 95

in 1996 for the urban areas (Renzi and Kruijt, 1997: 197), far exceeding the relation of 19 to 1 estimated for 1980 (FLACSO, 1991: 119). In Costa Rica, the relation between the average income of the 20 per cent poorest of the population and the 20 per cent richest was 12.2 times in 1980 (FLACSO, 1991: 119), reaching a relation of 13.2 in 1996 (MIDEPLAN, 1997: 250).

Poverty and exclusion Here we look at the levels of poverty in a country, in order to assess the degree of social citizenship. As we do not apply a dichotomy, three potential degrees of integration can be observed: exclusion, vulnerability and inclusion. Under these conditions, an individual may be socially excluded even when his or her income per capita places him/her above the poverty line. Social sectors whose activities are outside the dynamic circles of production and consumption are in a situation of relative exclusion, which may also be called vulnerability. This situation forces them to move downwards along the economic activity ladder; each movement means losing some accumulated social guarantees. This situation of relative exclusion or vulnerability may also bring about a move from depressed to dynamic zones of activity.6 Absolute exclusion refers to the impossibility of integrating in dynamic or non-dynamic activities within the physical boundaries of a country. People in this situation can only survive in a context of extreme poverty, and will eventually opt for definite physical exclusion by migrating abroad. This does not mean that all international migrants are in absolute exclusion. Instead, it is highly likely that some of the people who emigrate do so because they find their integration prospects reduced, or they are in vulnerable conditions. The issue of migration and its effect on the inclusion dynamics deserves more attention than is possible in this chapter. Nevertheless, it is worth noting that of the three countries, only Nicaragua has significant out emigration, mainly to Costa Rica and the United States. It is estimated that 500 thousand Nicaraguans live and work in Costa Rica, while around 250 thousand may be found in the United States. This amounts to nearly one-fifth of the total population of the country. This large proportion changes the analysis of social exclusion, as it represents exclusion as well as inclusion: remittances by family members increases the integration possibilities of the family members that remain in the country. The physical absence of the migrants has an effect on the statistical estimates of employment and poverty, while in

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the countries of destination they constitute a largely invisible population. In short, the migrants have renounced their rights to formal citizenship and, due to their precarious insertion in the labour market of their country of adoption, they remain marginalized from the rights of substantial citizenship. The dynamics of poverty in the region demonstrates that it is not a marginal phenomenon which affects a small group of people, but that it is a general phenomenon which bears witness to the inability of the political systems and of economic policies to guarantee decent living conditions for the majority of the population. Even in Costa Rica, where social indicators are good relative to most Latin American countries, some poverty measures indicate that the phenomenon could concern a third of the population.7 Recently, FLACSO Costa Rica (Facultad Latinoamericana de Ciencias Sociales) has investigated poverty in Central America based on the combined method to measure poverty. This procedure, consisting of crossing the poverty line (PL) and the unsatisfied basic needs (UBN)8 methods, allows for a dynamic exploration of the pauperization process.9 Using this methodology, four poverty segments emerge: (i) the non-poor, (ii) the income poor or new poor, (iii) the inertial poor, or poor whose basic needs are not satisfied and (iv) the structural poor, who are poor according to both methodologies. These segments may be integrated in the three inclusion levels of Bustelo and Minujin: the included, who correspond to the compartment non-poor in the combined method; the excluded, who are the structural poor; and the vulnerable, who are poor according to one of the two methods and who can be inertial or recent poor. Table 5.4 Central America: poverty and levels of vulnerability (% of population) Honduras Costa Rica Nicaragua (1996) (1994) (1996) Non-poor (integrated) 22 Inertial (vulnerable) 5 Recent (vulnerable) 26 Structural (excluded) 46

68 10 15 7

28 23 13 36

Note: Data for Costa Rica and Honduras are national aggregates; data for Nicaragua are for urban areas. Sources: Del Cid and Kruijt (1997), Renzi and Kruijt (1997), Sojo (1997).

Carlos Sojo 97

The data in Table 5.4 show that there are two clearly different models: in Costa Rica inclusion is the dominant form albeit that there is a large number of vulnerables, while in Honduras and Nicaragua less than one-third of the population belong to the included. Nevertheless, given the unequal size of the proportions of inertial and recent poor, the Nicaraguan situation would be one of declining exclusion, while the Honduran model would be one of rising exclusion. On the basis of this combined method, we can draw at least three conclusions. In the first place, social integration proves to be weaker according to this combined method than if only income poverty is measured, as governments usually do. According to the income line, 57 per cent of the families in Nicaragua live in conditions of poverty, 72 per cent in Honduras and 20 per cent in Costa Rica. However, the exclusion and vulnerability data derived from the combined method signal social integration problems in proportions of 72 per cent, 78 per cent and 32 per cent, respectively. In all cases, these figures are higher than the more positive result when a dichotomy poor–non-poor is applied. In the second place, the situation regarding the degree of social integration for Costa Rica is the opposite of that in the other two countries. In fact, the proportion of included in Costa Rica is similar to the proportion of excluded people in Nicaragua and Honduras. The third observation refers to the vulnerability issue. An inverted picture can also be noted in the proportion of inertial and recent poor in Nicaragua as compared to Honduras. In both cases these ‘poor’ add up to more than 30 per cent (36 and 31 per cent, respectively) but in Honduras the movement is mainly upwards (due to the predominance of the recent poor) while in Nicaragua poverty seems to be decreasing as most of the poor are inertial poor. This is the result of an income per capita that is above the poverty line but that is not yet high enough to satisfy some basic needs. The reason for this may be related to the post-war situation which allows a relative recovery of the family income. But, in a period of economic reform, this income is not yet sufficient to cover basic needs. The higher proportion of recent poverty in Honduras points to decreasing family incomes on a large scale, which is generally related to economic reforms and their depressing effects on certain economic activities. The data indicate that the situation of vulnerability dominates that of structural poverty in the case of Costa Rica. In Nicaragua, equal proportions of the population find themselves in a situation of exclusion and vulnerability, while in Honduras the number of vulnerables

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is two-thirds those of the excluded. The fact that only in Costa Rica the number of vulnerables surpasses the number of excluded, could indicate that the tendency towards vulnerability is larger when consumption thresholds are higher, implying that vulnerability is a clear manifestation of social impoverishment and not of gradual ascent, which could also be assumed (Figure 5.1). Finally, although it is not possible to compare effectively the data preceding the crisis, it is possible to assert that while in the 1990s, 72 per cent and 78 per cent of all Nicaraguans and Hondurans experienced some level of poverty and social exclusion, in 1980 the population living in poverty conditions was 61 per cent and 68 per cent, respectively. Although the data do not originate from comparable methods, this evidence gives the impression that the social condition of the people of Central America has not improved between 1980 and the mid-1990s. The risk of exclusion is also linked to employment and labour market issues. The growth of certain activities may foster the demand for

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Costa Rica Excluded Figure 5.1 Exclusion and poverty

Honduras Vulnerable

Nicaragua Included

Carlos Sojo 99

labour but this does not necessarily improve the possibilities for inclusion for the workforce as a whole.

Employment and exclusion The ability of generating employment is not the same in different sectors, nor are the possibilities for social integration. The industrial and agricultural activities require a larger workforce with a lower educational level than do the commercial, financial and government activities. As a result, the industrial and agricultural sectors provide a larger number of jobs but at lower salaries. The globalization process has brought about negative stimuli for investing in these activities, which has resulted in limited growth or even real decline of production in these sectors. This situation greatly victimizes the majority of the working population which lost its jobs in traditional production activities and which has not automatically been able to integrate in the new labour market. Data on the sectoral distribution of the economically active population is in Table 5.5. The changes generated in the social structure by the productive transformations tend to have distributive consequences and tend to be permanent.10 Different social groups are unequally affected. For example, the decline of domestic market production in agriculture and industry makes enterprises disappear or converts them into services

Table 5.5 Economically active population (EAP) by sector (%) Costa Rica (1992) Modern agriculture Subsistence agriculture Formal Informal Public Domestic New tradables Unclassifiable Unemployed Total a

Honduras (1992)

10.0 14.0 21.6 26.7 15.6 3.6 7.6 0.5 4.1

8.3 28.3 13.7 29.7 10.0 — 2.3 1.9 2.3

100.0

100.0

Nicaragua (1993) 4.8 23.1 6.5 37.5a 12.6 — — 4.1 11.4 100.0

Includes domestic labour.

Sources: Funkhouser and Pérez Sáinz (1997), Cordero and Mora (1997), Rocha and Terán (1997), Gómez and Guillén (1997).

100 Economic Reform, Citizenship and Social Integration

enterprises or firms producing tradables. Either way, the change is not reversible and implies job losses. One of the most important changes is the lower social and political position of the civil servant. Until the 1980s, the expansion of the public sector made employment in this sector an option for social stability and ascent for a large portion of the economically active population. In countries with an army, conscription contributed to the broadening of the citizen’s sense of belonging and dependence regarding the public sector. In Nicaragua and in Honduras, despite the fact that conscription was compulsory and arbitrary (in force until 1991 and 1995, respectively), a military career is a prestigious professional activity, and even a real stepping-stone for social ascent or for class repositioning. It is also one of the few labour segments that is still male-oriented: in Nicaragua, for example, most of the female state employees can be found in education and health (65 per cent), but the security sector employs the largest number of male employees (32 per cent) (GTZINIM, 1997). Public sector employment has been reduced in the three countries, but in different ways. The most intense reduction can be observed in Nicaragua (Evans, 1995), due to the greater size of the public sector before the reforms. The process started with the so-called ‘compacting’ that took place after the start of the 1988 reforms. It consisted of dismissals without compensation, and left around 17,000 public workers unemployed or with a precarious job in the informal sector. During the Violeta Barrios administration (as of 1990), the programme of ‘Occupational Conversion’ (Conversión Ocupacional) designed by the US AID (Agency for International Development) and similar to the Labour Mobility Plan (Plan de Movilidad Laboral) in Costa Rica, implied giving incentives of up to US$ 2,000 for employees who voluntarily opted for the programme. The result was a decrease of around 22,500 public jobs during the first year of operation of the programme. In Honduras, the measures to reduce the payroll have surpassed the results expected by the government. In 1996, the Honduran government reports payroll cuts of 17 per cent both from decentralized institutes and from the central government. This proportion greatly exceeded the promises of the ‘State Modernization Programme’ that implied a 10 per cent reduction of the payroll, excluding the employees working in the education and health sector. Between 1994 and 1996, a reduction of 7,200 public sector jobs came about in this country. The situation in Costa Rica is very complex because several projects to reduce the number of jobs in the public sector have been tried without

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success. The stabilization programme at the beginning of the 1980s froze all new contracts. Later, in the midst of the demands of the structural adjustment programmes, mechanisms to reduce employment were designed, initially compulsory and later voluntary. The latter had the same effect as was subsequently observed in Nicaragua: a greater loss of qualified personnel, resulting from the inability of private labour markets to absorb new contingents of less qualified workers. Finally, the closure of some public bodies has also produced a reduction in the state payroll. After 15 years of economic reforms and of strict control of the expansion of public jobs, the share of public employment in total employment diminished from 18 per cent in the pre-crisis year 1980, to 15 per cent in 1996, but the process has not been one of consistent reductions. Currently there are around 183 thousand public workers, as against 173 thousand at the start of the structural reforms in 1986, and 145 thousand in 1980. As a result, the Costa Rican state payroll has increased by around 40,000 jobs after the anti-state adjustment measures. The lack of public sector growth and the proliferation of negative values in relation to the state administration as compared to positive values of private enterprise, closed the possibility of using public employment as an instrument to acquire a higher social position. Currently the number of public workers is lower and the cultural attraction of public employment has decreased. Work in the private sector is better remunerated and generates other benefits, while the public sector is more and more discredited due to the expansion of corruption. Employment has also been reduced in the agricultural and industrial sectors. The redundancy in the agricultural sector has a negative effect on the income distribution, especially for those with a low education level. These social groups are unable to find other employment due to the rigidity and precariousness of the traditional labour market. Some move to economically more dynamic areas inside the national border, others migrate to foreign countries. The loss is substantial. In Costa Rica, the share of agricultural employment in total employment fell from 26 per cent in 1990 to 22 per cent in 1996, which meant a net loss of 9,000 jobs over this period. The same occurred in the industry sector. Its contribution in employment decreased from 18 per cent in 1990 to 16.5 per cent in 1996, and, although no decrease was reported over the whole period, 3,900 industrial jobs were said to be lost between 1995 and 1996 (MIDEPLAN, 1997). In Honduras, Central Bank data indicate that the relative importance of the population working in the agricultural and

102 Economic Reform, Citizenship and Social Integration

livestock sectors fell from 45 per cent in 1992 to 43 per cent in 1994. Mining and industry have remained stable (Robleda, 1996). While employment is lost in the agricultural sector, the growing sectors in industry and services are unable to generate new jobs. At least this is what the World Bank estimated in its cross-country studies (cited in Frundt, 1995). This inability leads to the expansion of informal employment in its most recent manifestations. The exception are the assembly industries, which have shown the largest expansion in employment in the region. According to Willmore (1997: 181), assembly employment increased in Honduras from 9,000 in 1990 to 20,000 in 1991 and 48,000 in 1995. Funkhouser and Pérez Sáinz (1997) have examined the recent evolution of employment in Central America, distinguishing nine labour sectors: modern agriculture, subsistence agriculture, formal, informal, public, domestic, new commodities, unclassifiable and unemployed.11 Table 5.6 allows an approximation of the structure of employment. First, we observe that in all the countries the informal sector attracts the main portion of the workforce, with figures above 25 per cent. Secondly, it can be seen that the sectors related to the new open economy generate little employment, as can be deduced from the employment shares of modern agriculture and the new tradables sector. Table 5.6 also allows us to make the following observations on the employment growth of each of these activities in the last few years. Table 5.6 Employment by sector (% share and annual rates of growth) Honduras 1989 Modern agriculture Subsistence agriculture Formal Informal Public Domestic New tradables Unclassifiable Unemployed Total

1989–92

Nicaragua 1985

1985–93

Costa Rica 1989

1989–92

6.7

13.2

5.5

2.0

9.8

2.5

35.2

3.0

22.3

0.1

16.0

2.4

11.5 26.8 9.3 5.2 1.1 1.1 3.0

11.7 8.6 7.3 7.1 42.0 30.0 4.6

7.7 31.7 31.0 — — 1.0 0.7

2.3 1.9 7.7 — — 34.7 181.3

19.0 27.3 16.2 — 6.8 1.2 3.8

6.9 1.2 0.7 — 6.4 18.7 4.6

100.0

4.5

100.0

0.4

100.0

2.0

Source: Calculated from Funkhouser and Pérez Sáinz (1997).

Carlos Sojo 103 Table 5.7 Percentage growth of average monthly income by sector Honduras (1989–92) Modern agriculture Agricultural subsistence Formal Informal Public Domestic New tradables Unclassifiable Total

Nicaragua (1985–93)

Costa Rica (1989–92)

4.0

2.2

1.8

2.2

1.4

2.0

3.7 3.5 8.2 1.9 3.1 19.4 3.6

7.6 0.7 2.5 — — 3.2 2.1

0.6 0.2 0.5 — 2.8 4.6 0.3

Source: Calculated from Funkhauser and Pérez Sáinz (1997).

First, the lack of growth in subsistence agriculture is evident, while in Nicaragua modern agriculture also lost jobs. Nicaragua also has negative growth rates of formal and public sector employment, while the latter is stagnant in Costa Rica. Honduras lists the highest growth rate of informal employment, but, at the same time, the highest increase in the new tradables sector; although this is due to a low contribution of this sector in the base year. In this country, employment is concentrated in the urban informal and the agricultural subsistence sectors. The same is true in Nicaragua; this was not visible until 1990 due to the increase in public sector jobs. In Costa Rica, the informal sector increased more between 1989 and 1992 than the public and agricultural subsistence sectors. The general direction of this transformation process is towards more precarious jobs and more exclusion. The idea of precariousness implies a deterioration in the quality of employment and in its remuneration and other labour conditions. It appears that the salaries generated by the informal sector remain relatively stable in Nicaragua and Costa Rica but decrease significantly in Honduras (Table 5.7). In contrast, only in Honduras does the income from activities in the agricultural subsistence sector increase. With respect to tradables production in rural or urban sectors, Honduras and Costa Rica show opposite trends: in Honduras, incomes in the new tradables sector increase, while they decrease in the modern agricultural sector. In Costa Rica the reverse occurs.

104 Economic Reform, Citizenship and Social Integration

A combined analysis These elements show the diversity of possible situations that may lead to problems of exclusion or vulnerability among the majority of the Central American population. The investigation of the exclusion possibilities based on employment, which we propose below, originates from a combination of the data compiled by Funkhouser and Pérez Sáinz and the three levels of inclusion set out by Bustelo and Minujin. In theory, inclusion may be the result of integration in the modern agriculture and new tradables labour market segments because these are potentially dynamic in the new globalized economy. According to Bustelo and Minujin, employment inclusion is characterized by the link to ‘highly dynamic and productive enterprises, intensive in technology and whose production is directed to the foreign market either totally or partially’. The vulnerable would concentrate on traditional activities with relatively low income (domestic employment), activities that are in the process of recomposition and deterioration (public sector), and activities in the private formal sector that is not modernized. According to Bustelo and Minujin, the vulnerables ‘operate in enterprises with an average productivity level, mainly directed towards the domestic market, … and include a high proportion of workers from the public sector’. The excluded would be the unemployed, the informal workers and the workers of the agricultural subsistence sector, as these groups meet with the assumption of Bustelo and Minujin that this category involves the ‘unqualified workers, linked to “traditional” enterprises with very little capital and low productivity, and that are directed towards the domestic market’. Nevertheless, as we have seen above, the indicators of precariousness of the labour market according to the FLACSO studies, do not seem to correspond fully with the possibilities of inclusion via the labour market position as viewed by Bustelo and Minujin. For this reason, we have established an empirical level of inclusion–exclusion per employment sector, based on its capacity to reduce the poverty risk of the family. This capacity was determined on the basis of a regression of the level of poverty on the employment sector of the household, thus revealing the differential contribution of each sector to the reduction of poverty in the different countries.12 This makes clear that it is not the activity in itself but its effect on the social condition of the household, which generates the level of inclusion or exclusion. Table 5.8 shows that the grouping of the employment sectors into the inclusion–exclusion framework is different for each country. It also

Carlos Sojo 105

deviates from the theoretical assumptions of Bustelo and Minujin, except for the exclusion level. Thus, if we consider the employment sectors that contribute most towards a reduction of poverty in all countries as the criterion for fostering inclusion, public sector and formal employment could offer possibilities for integration in all three countries. The new tradables sector only produces a significant decrease in poverty in Honduras where it can be considered an integrating activity. The workers in the new tradables and in the informal sectors are in a vulnerable situation in Costa Rica and Nicaragua. In Honduras, only the modern agricultural sector workers are in a vulnerable situation while this sector also implies vulnerability in Costa Rica (Table 5.8). In all three countries the jobs in the agricultural subsistence sector contribute very little to overcoming poverty and, consequently, they are placed in the exclusion group. In Honduras, the subsistence agricultural sector is accompanied by the informal and domestic sectors, and in Nicaragua by the modern agricultural sector since this sector contributed very little towards the reduction of poverty between 1985 and 1993. On the basis of this classification, we have constructed a model of inclusion–exclusion per sector for the three country cases (Table 5.9). The conclusion that may be drawn from these observations is that the possibility of social inclusion is linked to the growth of the traditional formal sector and of the public sector. The contribution of the new labour market sectors to the reduction of poverty cannot yet be

Table 5.8 Levels of inclusion–exclusion based on type of employment Minujin and Bustelo

Costa Rica

Honduras

Nicaragua

Inclusion

Modern agric.; new tradables

Public; formal

Public; formal;

Vulnerability

Formal; public; domestic

Exclusion

Subsist agric.; informal; unemployed

Informal; modern agric.; new tradables Subsist agric.; unemployed

Public; formal; new tradables Modern agric.

Subsist agric.; informal; domestic; unemployed

New tradables; informal Subsist agric.; modern agric.; unemployed

106 Economic Reform, Citizenship and Social Integration Table 5.9 Structure of inclusion–exclusion, per cent of economically active population

Included Vulnerable Excluded

Costa Rica (1992)

Honduras (1992)

Nicaragua (1993)

37.2 44.3 18.1

26.0 8.3 63.9

19.1 37.5 39.3

Note: As some of the economically active population is unclassifiable, numbers do not add to 100. Source: Calculated from Tables 5.5 and 5.8.

perceived. It is clear, moreover, that agricultural jobs, especially those in the subsistence sector, are not of any help for the improvement of the standards of living of the rural population. As may be observed, the evidence does not correspond with the affirmation by Bustelo and Minujin who ascribe the reduction of exclusion risks to the integration in growing economic sectors. To the contrary, in the studied countries, traditional employment in public and private sectors (including, for example, jobs in industry) continues to be essential for social integration. The picture is not very encouraging, especially if we bear in mind that the relative poverty data allow us to make an estimate of the current situation, while the labour market data suggest possible future developments. The exclusion level by employment sector is higher than the exclusion by poverty in all three countries, which brings us to the hypothesis that the current configuration of the demand for labour leads to a worsening of current social disequilibria. With respect to the number of vulnerables, we observed that they increase significantly in the cases of Costa Rica and Nicaragua, while in Honduras they significantly decrease. In the latter country, the proportion of included on the basis of the labour market increases, while the opposite trend can be observed in the other two countries. However, in Honduras the increase in the included is much more modest than the increase in the number of excluded, implying that the reduction in the vulnerables by poverty points more to an increase in exclusion by employment than to an increase in social integration. The figures for inclusion in Costa Rica and Nicaragua are considerably less favourable when comparing poverty with employment. While

Carlos Sojo 107

in Costa Rica 68 per cent of households belongs to the included if a lack of poverty is the criterion, this proportion falls to 37 per cent if employment is considered. In Nicaragua, the proportion falls from 28 per cent to 19 per cent.

Final reflections Leaving aside a complete analysis of the social disintegration possibilities as a result of the exclusion risks of citizenship and politics, we can still draw some conclusions – even though preliminary – when looking at aspects related to production and to the satisfaction of basic needs. The dynamics of the integration into the modernized and internationalized economy has generated 2 types of phenomena that entail risks of social exclusion: in the first place, a tendency towards a concentration of wealth which would even have been higher if the growth model had been able to generate sustained positive growth rates. That is to say, if we look at the Chilean experience, we could argue that the recession in Nicaragua and the instability and fragility of growth in Costa Rica and Honduras have avoided a more dramatic concentration. Yet, the extent of concentration is already alarming, although a reduction in inequality can be observed for the case of Costa Rica. Secondly, the uneven growth of economic sectors suggests a move towards speculative types of activities with several negative connotations: they generate fewer jobs for which the average income is much higher than in other economic areas and they operate in the framework of capital groups that are ever smaller in number while in control of many sectors of the economy. This may lead to a deterioration of the income distribution, which is already visible. On the other hand, they have demanded a concentration of financial resources that discriminates against non-tradable production, and against small agricultural and livestock enterprises, in particular. The dynamics of integration responds to a concentrated transnational model dominated by the service sector. This leaves few options for the generation of economic opportunities in the long run for societies with a fragile industry sector and with a low educational level. If we look at the disintegrating tendencies, there is little room for optimism. If measured in terms of income, the three countries present diverging situations with respect to social exclusion. On the one hand, Costa Rica has a high level of integration with a level of income poverty of approximately 20 per cent. On the other hand, Honduras and Nicaragua are

108 Economic Reform, Citizenship and Social Integration

only surpassed by Haiti in Latin America with respect to their poverty levels. We are dealing, therefore, with the contrast between an inclusion and an exclusion model. The picture is even more dramatic if we examine the pauperization tendencies with a multidimensional method. In Honduras and Nicaragua, more than 60 per cent of the population is excluded or is severely hampered in establishing social citizenship. If we consider employment as the means to socio-economic integration and as predictor of social integration through the link between the economic growth in a market environment and the reduction of poverty, we observe a reduction of the number of included and an expansion of the excluded as compared to the proportions derived from the multidimensional poverty indicator. In the case of Costa Rica, the exclusion based on employment more than doubles the exclusion based on poverty figures. In the other countries, where the levels of exclusion were already high, the proportion of excluded increases considerably in Honduras, while the proportion of included decreases in Nicaragua. We believe that the most significant fact is the limited capacity of jobs in dynamic sectors to generate social integration. Contrary to the predominant assumptions, traditional jobs, such as can be found in the public or the formal sectors, continue to have a greater social integration potential. The deterioration of the State and the State’s ability to generate employment, as well as the limited growth of traditional businesses limit the options to overcome future social exclusion. With respect to the poverty situation there is a gap between the inclusion model in Costa Rica and the exclusion models in Nicaragua and Honduras. This difference is caused by the positive effect of nearly four decades of social development policies that allowed high education indicators in Costa Rica as compared to the average for Latin America, along with improved availability of health services, electricity and drinking water. This was achieved in a time of significant economic growth promoted by strong State involvement. In Nicaragua and Honduras, by contrast, political conflicts, large military expenditure, limited redistributive policies and an economic growth model based on excessive concentration, have not been able to counter the high levels of exclusion due to poverty. While in Costa Rica the term ‘social citizenship’ refers to a real social situation, in the other countries it implies a challenge for the future, a Utopian horizon. However, looking at exclusion derived from the insertion in the labour market, the distance between Costa Rica and the other countries is smaller, and presents a challenge. Employment is no instrument for

Carlos Sojo 109

social integration if it does not guarantee a capacity to overcome poverty levels. The jobs that still provide social stability and integration (in the public and formal sector) are currently decreasing in number. This is due to the economic ‘integration’ strategy that demands less State involvement and that stimulates employment in tradable production for a few workers only, and employment in the informal sector for the majority. An economic process that generates higher exclusion rates thwarts the possible strengthening of substantial citizenship. In this perspective, the response must be to take measures directed towards the formation of a new substantial citizenship that is based on social considerations. The processes of political opening have allowed the ‘civilization’ of regimes, but political rights still need to be expanded, especially in relation to women and ethnic minorities. The processes of economic opening have expanded essential freedoms for the broadening of economic action by the private sector. Social rights, however, that should lead to more social justice and equity, do not show substantial progress. In order to offset the effects of the processes that hamper the consolidation of substantial citizenship, it is necessary to carry out different policies for economic and social development. In the new market economy, small agricultural and industrial enterprises are no longer an option for survival for an increasing population group that is being forced into a situation with precarious salaries or into the informal sector. It is necessary to renew policies to foster small enterprises, in order to offer a solid base for setting up an enterprise, and to encourage the integration with international markets. On the other hand, it is necessary to strengthen the supervisory tasks of the State regarding the labour guarantees that are very often eroded due to the zeal in attracting investment. International integration should not come at the expense of labour legislation. Finally, it is necessary to carry out comprehensive programmes for strengthening human resources, including health and education, housing, environmental policy, culture and recreation. These programmes will not only mitigate social exclusion but will also help to sustain economic and political equilibria at the macro level.

Notes 1. The choice of countries is related to two recent research projects carried out by FLACSO (Facultad Latinoamericana de Ciencias Sociales) in Costa Rica. Firstly, these three cases were studied in the framework of the New Poverty in Central America Project and its results were published in three volumes,

110 Economic Reform, Citizenship and Social Integration

2. 3.

4.

5.

6. 7.

8.

9.

all in 1997: Del Cid and Kruijt for Honduras; Renzi and Kruijt for Nicaragua; and Sojo for Costa Rica. These studies allowed us to collect and structure the recent but scattered information about different magnitudes of poverty and to make a qualitative assessment of the different theories based on in-depth interviews with impoverished urban families. Secondly, the author carried out a larger study to explore the dynamics of social change in these countries, with financial support of the Royal Government of Norway. A summary of the main reforms in each country is given in Sojo (1998). Bottomore (1992) distinguishes between formal and substantial citizenship; for the former, only the existence of a nation-state is required, while the latter includes political, social and economic rights. See also Marshall (1992), who defines three types of substantial citizenship: political, civic (which comprises economic rights), and social. Robinson (1997) refers to this segment as the transnationalized fraction of the national elite. He defines them as the national counterpart of the transnational elite that controls the global capital. The segment ‘is linked to transnational production, commerce and finance activities that do not have links to territories or particular identities and… their interest is in global accumulation more than local or national accumulation’. The salary regimes for high executives of international private companies, that have already begun to influence private employment in local companies as well as public employment, show a large gap with the income of workers. Figures for the United States can illustrate the magnitude of the phenomenon. Between 1980 and 1995 the payment to high executives (CEOs) increased by 500%, company profits by 145%, while salary expenses increased by 70%, fifteen points below the inflation for this period. See Castillo and Palma (1996), for the characteristics of the migrations and the profile of Central American migrants. It should be kept in mind that the comparative analysis of poverty indicators suffers from the problem of the relative and therefore country-specific measurement in each country. The purchasing power of estimated incomes is linked to cultural patterns of consumption and to the specific definition of satisfaction of basic needs. Poverty intensities are always different from country to country and at different moments. The data and analysis presented should therefore be seen as approximations specifically related to the problem at hand. The figures calculated with the PL method are not problematic since the method has been relatively accepted as standard. It includes establishing the average cost for a basic food package which is compared with the income per capita of the family unit. If the income is below the cost of the package, it points to extreme poverty, while if the income is below the cost of two packages, it points to basic poverty. There is more debate on the basic needs satisfaction method. The presented data, however, contains the following common parameters: overcrowding, access of children to education, and availability of drinking water and sewer systems. In Nicaragua and Honduras the general state of housing, the educational level of the adults and the reason for economic dependence of the household were also taken into consideration. See Katzman (1989) on the combined method.

Carlos Sojo 111 10. See the analytical framework of Przeworski (1991). The differences in intensity and nature of the social effects of economic reforms are crucial for the evaluation of political options and for identifying possible future developments. 11. The definition of the categories can be found in more detail in the methodological appendix of the publication referred to. The distinction between modern and subsistence agriculture is based on the size of the units and on the employment of professionals and technicians in the first sector. The same holds for the definition of formal and informal employment. The category of tradables basically includes non-traditional agricultural exports, assembly industries and tourism. 12. Using Funkhouser and Pérez Sáinz’s regressions of household poverty and employment sectors, we established the exclusion limit based on the dispersion of the coefficients with 3 standard deviations determined in relation to the weighted average of each of the employment areas. This decision is based on the assumption that we are dealing with highly polarized phenomena and that a high weighting for the typical dispersion is required in order to identify non-dichotomous trends. Thus, based on an average regression coefficient of 0.102, the vulnerability area for Costa Rica can be found in a coefficient that is higher than 0.086 and lower than 0.183; the vulnerability range for Honduras, based on an average of 0.093, would be between 0.079 and 0.162 and the vulnerability area for Nicaragua, based on an average coefficient of 0.075, can be located between 0.052 and 0.193. In all three cases, the inclusion levels are found above the vulnerability range and the exclusion levels are found below that range. This approximation allows us to calculate the contribution made by each of the employment sectors to the reduction of poverty, taking the specific importance of that sector in the total economically active population into account. I would like to thank Juan Pablo Pérez Sáinz for his methodological advice on this topic.

References Banco Mundial (1995) Honduras: Memorando Económico y Evaluación de la Pobreza, March 1995, Washington, DC: The World Bank. Bottomore, T. (1992) Citizenship and Social Class, Forty Years On, London: Pluto Press. Bustelo, E. and A. Minujin (1997) ‘La política social esquiva’, in R. Menjívar Larín, D. Kruijt and L. van Vucht Tijssen (eds), Pobreza, Exclusión y Política Social, San José: FLACSO Costa Rica. Castillo, M. A. and S. Palma (1996) La emigración internacional en América Central: Una revisión de tendencias e impactos, Guatemala: FLACSO Guatemala. Consejo Montario Centroamericono (CMCA) (1990) Anuario Estadístico, San José: CMCA. Consejo Monetario Centroamericano (CMCA) (1997) América Central: Anuario Estadístico, San José: CMCA. Cordero, A. and M. Mora (1997) ‘Costa Rica: El Mercado de Trabajo en el Contexto del Ajuste’, in E. Funkhouser and J. P. Pérez Sáinz (eds), Empleo y Pobreza en América Central. Ganadores y perdedores del ajuste estructural, San José: FLACSO Costa Rica.

112 Economic Reform, Citizenship and Social Integration Del Cid, R. and D. Kruijt (1997) Los Pobres Cuentan. Pobreza y Gobernabilidad en Honduras, San José: FLACSO Costa Rica. Evans, T. (1995) ‘El impacto del ajuste estructural en el sector público de Nicaragua’, in T. Evans, C. Castro and J. Jones, El Ajuste Estructural y el Sector Público en Centroamérica y El Caribe, Managua: CRIES. FLACSO (Facultad Latinoamericana de Ciencias Sociales) (1991) Centroamérica en cifras, San José, FLACSO/IICA (Instituto Interamericano para la Cooperación Agraria). Franco, E. and C. Sojo (1992) Gobierno, comerciantes y políticas de ajuste, San José: FLACSO Costa Rica. Frundt, H. (1995) ‘The Effectiveness of National Labor Codes in Central America’, Paper presented at the LASA (Latin American Studies Association) meeting in Washington, DC. Funkhouser, E. and J. P. Pérez Sáinz (eds) (1997) Empleo y Pobreza en América Central: Ganadores y perdedores del ajuste estructural, San José: FLACSO Costa Rica. Ghysels, J. (1995) El empleo en Nicaragua: como la crisis actual se generaliza para el año 2000, Managua: Nitlapán-Fundation Ebert. Gómez, R. and M. Guillén (1997) ‘Honduras: Políticas de ajuste, mercados de trabajo y pobreza’, in E. Funkhouser and J. P. Pérez Sáinz (eds), Empleo y Pobreza en América Central: Ganadores y perdedores del ajuste estructural, San José: FLACSO Costa Rica. GTZ-INIM (Deutsche Gesellschaft für Technische Zusammenarbeit – Instituto Nicaragüense de la Mujer) (n.d.) Diagnóstico de género del Proyecto de Reforma del Sector Público. Acercándose al tema, Managua: GTZ. Jameson, K. P. (1992) ‘The Financial Sector in Latin American Restructuring’, Paper presented at the LASA meeting in Los Angeles. Katzman, R. (1989) ‘La heterogeneidad de la pobreza. El caso de Montevideo’ Revista de la CEPAL, no. 37. Marshall, T. H. (1992) Citizenship and Social Class, London: Pluto Press. Menjívar Larín, R., D. Kruijt and L. van Vucht Tijssen (eds) (1997) Pobreza, Exclusión y Política Social, San José: FLACSO Costa Rica. MIDEPLAN (Ministerio de Planificación Nacional) (1997) Costa Rica Panorama Nacional 1996: Balance Social, Económico y Ambiental, San José. Pérez Sáinz, J. P. (1996) De la Finca a la Maquila, San Juan: FLACSO Costa Rica. Przeworski, A. (1991) Democracy and the Market: Political and Economic Reform in Eastern Europe and Latin America, Cambridge: Cambridge University Press. Renzi, M. R. and D. Kruijt (1997) Los Nuevos Pobres: Gobernabilidad y política social en Nicaragua, San José: FLACSO Costa Rica. Robinson, W. (1997) ‘Transnational processes in Central America: A Study on Globalization and Social Change’, Paper presented at the LASA meeting, Guadalajara. Robleda, R. (1996) La situación económica y social y las políticas gubernamentales, Tegucigalpa: CEDOH. Rocha, J. and J. C. Terán (1997) ‘Mercado laboral y pobreza en Nicaragua’, in E. Funkhouser and J. P. Pérez Sáinz (eds), Empleo y Pobreza en América Central. Ganadores y perdedores del ajuste estructural, San José: FLACSO Costa Rica. Saldomando, A. (1996) Nicaragua: Con el futuro en Juego, Managua: CRIES. Sansources, A. (1984) Los grupos económicos: Control y Políticas, Estudios de CEPAL No.15, Santiago.

Carlos Sojo 113 Sojo, C. (1995) ‘En el nombre del padre: Patrimonialismo y Democracia en Costa Rica’ in B. M. Rojas and C. Sojo (eds), El Malestar con la Política: Partidos y Elites en Costa Rica, San José: FLACSO Costa Rica. Sojo, C. (1997) Los de en Medio. La nueva pobreza en Costa Rica, San José: FLACSO Costa Rica. Sojo, C. (1998) Reforma Económica, Estado y Sociedad en América Central, San José: FLACSO Costa Rica. Vega, M. et al. (1996) Cambios en la estructura de clases en Costa Rica a partir de la década de los ochenta (1987–1995), San José: UCR. Willmore, L. (1997) ‘Políticas de Promoción de Exportaciones en Centroamérica’, Revista de la CEPAL, no. 62.

6 Crisis, Adjustment and the Dynamics of Gender Relations in Central America and the Caribbean A. Geske Dijkstra

Introduction For most countries of the region, the 1990s were a period of macroeconomic recovery after the ‘lost decade’ of the 1980s. These countries went through a period of macroeconomic crisis in the early 1980s, attempted to solve the crisis first by increased borrowing and then, at some point in time, began to ‘adjust’. This implied that austerity measures were taken aimed at stabilization of the economy. Most countries also embarked on economic reforms, but this occurred towards the end of the 1980s or in the beginning of the 1990s.1 The results of stabilization and adjustment programmes are mixed. In some countries, growth rates were still negative in the early 1990s, while in others the macroeconomic situation had already improved in the second half of the 1980s. This chapter examines the impact of crisis and adjustment on gender relations. Eventually, stabilization and structural adjustment are expected to lead to economic growth in all countries. The sustainability of that growth depends partly on what happens to gender relations in the region. From the literature, we know that stabilization and structural adjustment measures have different effects on men and women (Benería and Feldman, 1992; Sparr, 1994). This follows from the fact that ‘the economy is a gendered structure’ (Elson and McGee, 1995). This gendered structure is reflected, in particular, in the sexual division of labour, in the lack of recognition for unpaid work which is mainly carried out by women, and in the unequal access to resources within the household (Elson, 1995). Policies that do not take these inequalities and specific gender relations into account are less effective. In general, gender inequalities reduce the efficiency of the economy and cause lower growth rates (Agarwal, 1995; Palmer, 1995; World Bank, 1995). 114

A. Geske Dijkstra 115

The starting point for this chapter is that the gendered effects of crisis and adjustment policies are caused and mediated by existing gender inequalities of all types: cultural inequality (ideas and norms on gender roles), inequality in power, and inequality in access to social and economic assets. It is, therefore, important to measure this existing gender inequality. In addition, if adjustment affects women more than men, this should be reflected in a worsening of indicators of gender inequality. The problem is, of course, that gender inequality is not only influenced by economic policies. Gender inequality may be exacerbated by the political and religious system, as under the Taliban in Afghanistan, or may reduce as a result of structural trends such as urbanization. Positive trends or factors may counteract against eventual negative effects of structural adjustment policies. It is assumed that economic policies will affect the access to social and economic assets more directly. However, a change in these indicators will have consequences for gender inequality in other dimensions (culture, power) as well. In this sense, the different dimensions of gender inequality also interact with each other. The interactions between gender relations, existing inequalities, economic policies and other factors can be visualized as in Figure 6.1. The region Central America and the Caribbean is interesting for the examination of the relations between these variables. With respect to gender relations, there are large differences between countries. In

economic policies

economic outcomes

gender equality:

gender equality:

culture power social assets economic assets

culture power social assets economic assets

other factors other policies

Figure 6.1 Relations between variables

116 Crisis, Adjustment and the Dynamics of Gender Relations

particular, cultures are different, as they are influenced by the different colonial histories of the countries. Central America and the Spanishspeaking Caribbean have been influenced by the Catholic Church and by a patriarchal culture in which men control their wife’s labour and sexuality. Women are primarily seen as mothers and are responsible for reproduction. Men are seen as superior, and are active in the economy and in the public realm. Women are active in the house (casa) and men in the street (calle) (Safa, 1995: 47). In the Caribbean, a larger proportion of the population has a history of slavery. As slaves, women have always been important as workers and providers (Bolles, 1991). Unlike Spanish-speaking countries, this financial responsibility was seen as compatible with women’s reproductive role (Deere et al., 1990: 10). Historically, female labour market participation in the English-speaking Caribbean has been higher than in Spanish-speaking countries and Central America.2 However, this shared responsibility of women for providing household income in the English-speaking Caribbean does not seem to have led to more visibility in society via higher labour market and political positions. A first question to be dealt with in this chapter is whether and to what extent these cultural and structural differences are reflected in comparative statistics on some indicators for the different dimensions of gender inequality. This is the assessment of the existing inequality. A further question is how these differences in gender inequality mediated the differential effects of crisis and adjustment measures. Finally, I examine what happened to some aspects of gender relations and gender inequality in general in a period of economic crisis and adjustment, bearing in mind that the changes in gender inequalities may have been influenced more by cultural and structural trends or factors than by (economic) policies. Answering these questions is hampered by serious data limitations and analytical problems. Gendered statistics on many relevant items are not available. Data sources used in this chapter include statistical databases, mainly from the Women’s Indicators and Statistics Database of the UN (WISTAT), and secondary sources, in particular, available country case studies. A problem with available country studies is that they usually tell very little about the changes over time: the dynamics of gender relations.3 This chapter attempts to provide some insights in these changes over time. In so doing, it is dependent on the limited availability of statistical data. The data allow for comparisons between 1980 and (around) 1990. In 1980, the economic crisis for most countries began. However, most

A. Geske Dijkstra 117

countries did not apply structural adjustment measures in the strict sense (microeconomic reforms) in the 1980s. This means that I investigate the impact of economic crisis and stabilization measures, rather than the impact of economic reforms (adjustment in the strict sense). The next section provides some background information on the different countries and their structural adjustment policies. The rest of the chapter deals with the three questions defined above.

Crisis and adjustment in Central America and the Caribbean Table 6.1 presents some background data on the countries of the region. The countries are ordered according to ‘subregion’: first the seven Central American countries, then the Spanish-speaking Caribbean, then the English-speaking Caribbean (officially at least; many of them are bilingual with Spanish or French), then French Caribbean and finally Dutch Caribbean. There are large differences in size of the countries, as measured by population. Cuba, Guatemala, the Dominican Republic and Haiti are the most populous countries according to data of 1990 (first column). Central American countries are more homogeneous with respect to population size (with the exception of Belize) than Caribbean countries, where the differences are large. In terms of GDP per capita, the Bahamas by far outweighs the other countries or territories. Other Caribbean countries or territories like Puerto Rico, Trinidad and Tobago, and Barbados follow. The average citizen of Belize, Panama and Costa Rica is richer than a citizen of the other Central American countries. Haitians and Nicaraguans are the poorest of the whole region, followed by people living in Guyana and Honduras. To some extent, there seems to be a relationship between the level of GDP per capita and the degree of urbanization: the Bahamas, Cuba (for which no GDP is available), and Puerto Rico are most urbanized, Haiti and Guyana are least. In the following, I concentrate on the larger Central American and Caribbean countries, excluding tiny countries and provinces, colonies, and territories (for which less data are available) from the analysis. At around 1980 the economic crisis began to manifest itself in the region. The prices of the most important export products (coffee, sugar, bananas) began to fall in the wake of decreased world demand. In addition, interest rates on the extensive foreign debts soared. The impossibility of further borrowing on international commercial markets was the final blow. As a result, all Central American countries had low or

118 Crisis, Adjustment and the Dynamics of Gender Relations

negative growth rates in the early 1980s (Table 6.1). In Nicaragua, El Salvador and Guatemala growth rates were also affected by civil wars. Panama was least affected by the economic crisis, with 2.9 per cent average annual growth in the first half of the 1980s. However, in the second half growth rates became negative there also. In most other Central American countries some recovery took place in the second part of the decade. However, in Nicaragua the crisis intensified. This

Table 6.1 General indicators, Central America and the Caribbean Country

pop90a

Belize Costa Rica El Salvador Guatemala Honduras Nicaragua Panama Cuba Dominican Republic Antigua & Bermuda Bahamas Barbados Dominica Grenada Guyana Jamaica Puerto Rico St Kitts and Nevis St Lucia St Vincent & Grenadines Trinidad & Tobago French Guyana Guadeloupe Haiti Martinique Neth. Antilles Suriname

183 3,035 5,172 9,197 5,138 3,676 2,418 10,608 7,170

gdpc90b 4.2 3.9 2.0 2.5 1.5 0.3 3.6 2.3

gr80–5c

gr85–90c

gr90–2c

urb80d

urb90d

0.4 0.3 1.9 1.1 1.1 0.6 2.9 7.8 1.5

9.3 4.6 1.9 2.9 3.1 3.6 1.4 0.9 2.0

5.7 4.1 4.3 4.2 4.3 0.2 9.1 19.7 3.6

48 40 37 36 53 50 69 52

44 47 38 40 55 47 73 59

5.4

6.9

3.0

255 257

18.5 8.1

5.3 0.8

3.5 3.8

1.1 3.4

75 32

89 796 2,420 3,530 44

3.3 1.2 3.2 10.6

4.8 3.5 0.1 2.9 4.9

5.7 3.3 4.6 4.5 5.7

1.8 6.9 0.9 3.2 3.7

22 41 67

148 11

3.1 3.7

3.8 5.7

5.7 7.3

4.1 4.7

36

1,236

9.7

2.5

2.2

0.4

47

390 6,486

0.7

0.4 0.9

5.2 0.1

0.9 5.3

25

172 422

2.8

0.9 0.3

4.0 1.2

0.9 3.8

a

Population, in thousands. GDP per capita, in thousands of PPP $. c Annual average growth rates. d Percentage of population living in urban areas. b

Source: UN, Women’s Indicators and Statistics Database (WISTAT), CD-ROM.

31

A. Geske Dijkstra 119

was due to increased activities of the Contras and to inefficiencies in the economic policy (Dijkstra, 1992). El Salvador, where the civil war also continued until 1990, also registered a low growth. In the Caribbean, similar low or negative growth rates were registered in the early 1980s in the Dominican Republic, Guyana, Jamaica, Puerto Rico, Trinidad and Tobago, Guadeloupe, Haiti, the Netherlands Antilles and Surinam. Among the non-tiny Caribbean countries, the only country that did not experience economic crisis in the early 1980s was Cuba. The impact of declining terms of trade began to be felt in that country at around 1985. A real crisis began around 1990 when Cuba no longer enjoyed aid and access to subsidized oil from the (former) Soviet Union and the whole economy collapsed (Eckstein, 1997). Most Central American countries could postpone harsh stabilization measures and economic reforms (Buttari, 1992). Counter-insurgency (US) foreign aid was given on a large scale to Costa Rica, El Salvador, Guatemala and Honduras. Part of this aid could be used to finance balance of payments’ and government deficits. Nicaragua enjoyed aid from Latin American, European and Soviet bloc countries, although this reduced substantially in the course of the decade. The only Central American country that did apply stabilization and structural adjustment measures early in the 1980s (in 1983) was Costa Rica. Among the larger Caribbean countries, adjustment packages were adopted in Jamaica (1979) and in the Dominican Republic and Trinidad and Tobago in the mid-1980s. These packages were mainly stabilization packages, however, and contained few reforms. Out of the countries that had carried out stabilization measures, Costa Rica was relatively successful while growth rates improved very little in the Dominican Republic. In Trinidad and Tobago, the economic crisis continued well into the 1990s. In Haiti the crisis also continued after 1990; this can be partly ascribed to political instability in that country.

Gender equality in Central America and the Caribbean I begin by examining gender inequality in the base year of this study, 1980. Several indicators can be looked at (see also Dijkstra, 2000). A first set of variables is related to women’s autonomy over their bodies, in particular reproductive rights: contraceptive use and fertility indicators. Many factors are of influence on contraceptive use by women: awareness, for example through education, physical and material accessibility, and attitudes. The latter implies that husbands, social environments and religion allow women to decide to have fewer children.

120 Crisis, Adjustment and the Dynamics of Gender Relations

According to McLaren (1990: 253), ‘contraceptives can be … predicted to work in societies where fertility rates are already dropping’. This means that the use of contraceptives is in fact a strong cultural indicator since it reflects changing attitudes on size of families and the role of women therein. Apart from the possibility to decide on fewer children, contraceptives also allow women to have sexual intercourse without fear of becoming pregnant. However, the use of contraceptives is not always a sign of increased female autonomy. This is especially the case if women are forced to use contraceptives in the name of population policies and if proper information and tests are lacking (Smyth, 1996). It is also the case if women are forced to use contraceptives by their husbands.4 Although sterilization of poor women has occurred in the region (Puerto Rico, some Central American countries), forced contraceptive use in the name of population control is less likely, although it cannot be excluded. On the whole, contraceptive use has been shown to be important for increasing female autonomy, for example for Jamaica (Rawlins, 1987). In that country, there was a relationship with increased female education as well as increased participation on the labour market. For this reason, contraceptive use can be considered a rough and partial indicator for the extent to which women have control over their bodies and sexuality. It captures part of the cultural as well as the power dimension of gender inequality. The available statistics include the fertility rate and the use of contraceptive methods by married women. A limitation of the latter is that it does not contain data for unmarried women. From the figures on contraceptive use shown (Table 6.2), I subtracted ‘methods’ that give either less security and/or reflect less female autonomy, namely abstention, rhythm, douche and withdrawal. In Central America, the percentage of married women using a relatively reliable contraceptive method proved to be high in 1980 in Costa Rica and Panama. In the other Central American countries this proportion was much lower, and it was very low in Guatemala. In the larger Caribbean countries contraceptive use seemed to be rather widespread although lower than in Costa Rica and Panama. In the poorest countries, Haiti and Guyana, contraceptive use was lowest. Fertility rates were much lower in most Caribbean countries than in Central America – again, with the exception of Haiti. In this respect, the Spanish colonization and the Catholic religion seem to have led to a later reduction in fertility in Central America (and Spanish-speaking Dominican Republic) as compared with the English-speaking Caribbean.

A. Geske Dijkstra 121 Table 6.2 Urbanization, contraceptive use and fertility indicators Country

Costa Rica El Salvador Guatemala Honduras Nicaragua Panama Cuba Dominican Rep. Guyana Jamaica Trinidad & Tobago Haiti

Urbanizationa

Contraceptive useb

Fertilityc

80

90

80

90

80

90

48 40 37 36 53 50 69 52 22 41 47 25

44 47 38 40 55 47 73 59

56 32 15 24 26 55

58 44 19 33 45

3.9 5.7 6.4 6.6 6.4 4.1 2.1 4.7 3.9 4.0 3.4 5.4

3.4 4.5 5.8 5.6 5.6 3.1 1.8 3.8 2.8 2.7 3.0 5.0

31

42 29 54 46 6

68 52 63 45 9

a

Percentage of population living in urban areas. Percentage of married women using contraceptive methods; abstinence, douche, rhythm and withdrawal have been subtracted. c Fertility rate: average number of children per woman. b

Source: UN, Women’s Indicators and Statistics Database (WISTAT), CD-ROM.

Another measure for female power is the share of women in parliament, as also used by UNDP (1995) for the construction of the Gender Empowerment Measure (GEM). The share of women in parliament is important in two ways. First, it is an indicator of women’s access to the public sphere (calle), in other words, the relative autonomy of women to participate in institutions outside the household. Second, political power is an instrument for achieving laws and state policies that are in favour of women. In this second (instrumental) aspect, this dimension has relationships with all other dimensions. The use of this indicator clearly has some limitations (Wieringa, 1997). Women often use other ways and channels to further their interests (e.g. women’s movements); if they use formal political representation, they tend to be more active at lower levels such as municipalities (Waylen, 1996). In addition, female representation is no guarantee for the promotion of women’s interests in laws and state policies in general. Yet, we can assume there is some relationship between female representation in parliament and relative female power. In practice, female representation in parliament is very low in all countries except Guyana and Cuba (Table 6.3).

122 Crisis, Adjustment and the Dynamics of Gender Relations Table 6.3 Female share in parliament (in per cent)a Country Costa Rica El Salvador Guatemala Honduras Nicaragua Panama Cuba Dominican Republic Guyana/Jamaica Trinidad & Tobago Haiti a

1985

1994

11 3 7 5 15 6 34 5 37 15

12 8 5 12 16 7 23 10 37 18 3

If applicable, both representative bodies have been added.

Source: Elaboration of UN, Women’s Indicators and Statistics Database CD-ROM.

For access to social resources, 1980 statistical data were available on relative life expectancy and on relative female school enrolment. For life expectancy, the relative female/male score was taken, after correcting for the fact that women, on average, live five years longer than men.5 For school enrolment, I computed the relative female/male ratio of combined primary and secondary enrolment. Most countries do rather well on relative female attainment (Table 6.4).6 However, relative female life expectancy is significantly lower in Guatemala and Haiti, and relative female school enrolment is very low in these same countries. These countries also have a low score on use of contraceptives (see above). This confirms a relationship between education and the latter variable. To some extent, female access to education also reflects cultural attitudes; on the other hand, female education enhances the awareness of the existence and likelihood of using contraception. In Guatemala and Haiti, gender inequality seems to be high on several dimensions. Sugarman and Straus (1988) found that there was a relationship between income inequality and gender inequality, when comparing performance of US states. This seems to be confirmed for the region: Guatemala and Haiti are also characterized by large income inequalities in general: they have the highest scores on UNDP’s Human Poverty Index of the region, with 46 per cent (Haiti) and 36 per cent (Guatemala) of the population being poor (see UNDP, 1997). The low relative female social attainments in Guatemala are probably also

A. Geske Dijkstra 123 Table 6.4 Social indicators: relative female/male achievements Country

Costa Rica El Salvador Guatemala Honduras Nicaragua Panama Cuba Dominican Rep. Guyana Jamaica Trinidad & Tobago Haiti

Life expectancy ’80 (1)

’90 (2)

99 116 97 97 99 96 97 97 100 99 100 93

99 111 99 98 105 98 97 98 102 99 100 95

Enrolment

(3) (2) – (1)

’80 (4)

’90 (5)

(6) (5)(4)

6 2 1 6 2

104 98 84 101 108 101 100

100 102 84 107 115 101 104 111 101 105 101 95

4 3

1 2

1

100 106 86

6 6 4 1 1 9

Source: Elaboration of UN, Women’s Indicators and Statistics Database (WISTAT), CD-ROM.

related to the low public expenditure in this country (9.1 per cent of GDP in 1995, World Bank, 1997). An indicator which cannot be gendered but which nevertheless reflects the way society deals with women’s welfare, is maternal mortality rates. At the same time, one can expect a relationship with economic development in the country, and, in particular, with the quality of the health system. Maternal mortality rates were very high in Haiti, and also in Guyana and Nicaragua (Table 6.5, first column). The English-speaking Caribbean countries, Jamaica and Trinidad and Tobago, had low maternal mortality rates, as did Costa Rica. These countries are all known for their relatively good health care system. With respect to access to economic assets, several indicators have been examined. The female economic activity rate relative to the male activity rate,7 is an indicator for the relative visibility of female labour. This rate was highest in Jamaica and Haiti, and also high in Cuba and Trinidad and Tobago. Some relationship with a historical dominance of slavery can be observed here. Relative female labour market participation was clearly lower in Spanish-speaking Central America and the Dominican Republic. In Cuba, female labour market participation also increased as a result of socialism. Policies have stressed the importance of women in social life while at the same time reducing individual wages. As a result, women were forced to earn a living. However, in

124 Crisis, Adjustment and the Dynamics of Gender Relations Table 6.5 Maternal mortality rates (per 100,000 births) Country

1980

Costa Rica 35 El Salvador 71 Guatemala 96 Honduras 82 Nicaragua 190 Panama 73 Cuba 60 Dominican 66 Rep. Guyana 200 Jamaica 36 Trinidad & Tobago 49 Haiti 367

1990

Differencea

25 127 200 117 103 60 32 90

115 80 340

0

a

‘’ means more than 10% improvement (so decline), and ‘’ would mean more than 50% improvement; ‘’ means more than 10% deterioration (increase) and ‘’ means more than 50% deterioration. Source: Elaboration of UN, Women’s Indicators and Statistics Database (WISTAT), CD-ROM.

recent years female participation in the formal labour market has decreased again as a result of the economic crisis which required a fall back to a subsistence economy; this was accompanied by state propaganda emphasizing the importance of women as housewives (Smyth and Padula, 1996; Eckstein, 1997). Another relevant indicator for measuring inequality on the labour market is the degree of occupational segregation. This is a measure of the sexual division of labour among occupations. It is both a reflection of cultural ideas about ‘women’s work’ and ‘men’s work’, and an indicator of the degree of wage inequality between men and women: ‘male occupations’ are generally paid better than ‘female occupations’. Generally, men are in the jobs with better career prospects, and they are offered more training opportunities. This means that horizontal, or occupational segregation is often accompanied by vertical segregation in the labour market. For employers, job segregation is a way to circumvent laws on equal pay for work of equal value (World Bank, 1995). From WISTAT data I computed this segregation on the basis of the female/male distribution in nine occupational categories,8 using the Duncan index (see Tzannatos, 1990). If segregation is lower (higher), it

A. Geske Dijkstra 125 Table 6.6 Relative female/male economic activity ratea and occupational segregation indexb Country

Costa Rica El Salvador Guatemala Honduras Nicaragua Panama Cuba Dominican Rep. Guyana Jamaica Trinidad & Tobago Haiti

Relative economic activity rate

Occupational segregation

’80

’90

’80

’90

28 33 16 19 27 37 44

28 34 20 23 34 39 48 14 34 83 43 70

44 45 55

36 38 45 58

52 45 18 40 33 42 41

46

32 83 40 76

31 30 44 40

a

Female activity rate (female economically active population/total female population), in per cent, divided by male activity rate, in per cent. b Duncan index, computed as follows: D1/2* SUM |fi – mi|, i1, 2,…, k. D is the index, fi(mi) is the proportion of women (men) in occupational category i as a percentage of the total female (male) labour force, k is the number of occupational categories (nine in this case), and the summation refers to the absolute difference between fi and mi (Tzannatos 1990: 106–7). Source: Elaboration of UN, Women’s Indicators and Statistics Database (WISTAT), CD-ROM.

means that more (less) women are active in ‘male’ occupations. In general, occupational segregation in 1980 was higher in Central America than in the Caribbean (Table 6.6). This is in line with the overall higher gender inequality in the labour market in Central America, as reflected by lower female participation.

The impact of adjustment In reviewing the effect of structural adjustment measures, a distinction must be made between stabilization policies aimed at reducing macroeconomic deficits, and structural reforms aimed at increasing production. Although restoring macroeconomic balances is a necessary

126 Crisis, Adjustment and the Dynamics of Gender Relations

condition for economic growth, it is generally acknowledged that stabilization measures, such as reducing public expenditure, may also harm long-term growth prospects. This is particularly the case if these measures include reductions in investment in social and physical infrastructure. Structural reforms, such as trade reform, financial liberalization and privatization, are generally assumed to increase the supply of goods and services. The short-term expected social effects of stabilization policies are, in fact, not very different from the effects of the economic crisis itself. They include lower employment and reduced real wages, the latter also reduced by a cut in subsidies for basic needs and for health and education services. Several authors have written about the gendered effects of these policies (see Benería and Feldman, 1992; Sparr, 1994; Elson, 1995). In many societies, women already have less access to public services such as health and education. Reducing government expenditure for these services further limits the possibilities for girls and women to use them. In addition, reducing health services will increase the workload for poor women, since they will have to take over caring tasks at the household level (Palmer, 1992). Policies usually do not take women’s time in unpaid work into account. Women also tend to be affected more by reductions in state expenditure for health and education. Traditional gender identities lead to an over-representation of women in this sector of the labour market, so they are more likely to lose their jobs. Reduced household incomes will force more household members, usually women, to look for paid work. Since possibilities in the formal sector are limited, the informal sector is likely to increase. Due to their obligations in caring and household tasks, and their, on average, lower education and skills, and lower access to assets in general (credit, means of transport, technology), women’s possibilities to earn a good income in the informal sector are more limited. The general reduction in wage levels, and in state subsidies on food and other necessities, harm women and children in particular, since women spend more of their income and time on feeding their families than men. Given that unpaid work remains mainly a woman’s task, women will experience longer working days. These gendered effects may also reduce the effectiveness of stabilization policies, by reducing the basis for long-term growth (Elson, 1995). Part of the costs of reducing state services is not immediately visible, for example, if girls’ education is affected, women’s health situation gets worse and if, due to time constraints, women have fewer possibilities to participate in the paid labour market.

A. Geske Dijkstra 127

Economic reforms, or structural adjustment in the strict sense, will also have different effects on men and women. These reforms include changes in relative prices in favour of tradables at the cost of nontradables, and a reduction of the state and state intervention in the economy. Export production is stimulated at the cost of production for the domestic market. Whether women are affected more than men by the reduction of the public sector and by privatizations depends on the existing employment structure (Elson, 1995). However, women will often be the first to be fired. Other production shifts may both benefit women’s employment and reduce it, depending on the concrete changes and the existing sexual division of labour. In urban areas, production is expected to move from formerly protected industries to industries producing for export, as well as to export-oriented services such as tourism. Although total employment may increase, this shift is usually accompanied by lower wages and other deteriorating labour conditions for both men and women involved, especially within industry. Furthermore, the expansion of export industries is often limited to new assembly factories in ‘export processing free zones’. These industries do bring employment opportunities for women, but labour conditions are harsh, turnover is high and it is mainly young women who benefit. Liberalization of food imports often means that production of food crops for the market is no longer competitive, which sometimes affects income opportunities for rural women. In general, these structural shifts are not gender-neutral, and they may have consequences for future gender relations. However, in addition to these gendered effects of reforms, the effectiveness of these reforms itself is influenced by gender relations (Elson, 1995). Unequal gender relations will prevent many women from taking advantage of market opportunities. Women suffer from a ‘tax on reproductive labour’ (Palmer, 1992). In order to participate on an equal footing in a market economy, women should have the same resources in terms of health and education, should be free from gendered violence, and should have equal access to assets such as property, credit, time, other state services and jobs. This is usually not the case. In consequence, 50 per cent of the population is not able or is less able to benefit from market reforms. This is expected to hamper the ‘supply response’ of reforms. This will be even more serious if an increase in production is supposed to come from production that is currently mainly carried out by women. For example, if women are expected to shift attention from food crops to export crops but men receive the additional income from the latter, the incentive structure is not

128 Crisis, Adjustment and the Dynamics of Gender Relations

conducive for bringing about the desired shift in production (Elson, 1995). The expected supply increase will not come about. In sum, negative consequences of reforms may affect women more than men, and women may be last to benefit from the positive consequences. This is not only bad from an equity or welfare point of view, but may also affect efficiency, i.e. the effectiveness of reforms itself. In this section, I analyze the gendered impact of economic crisis and stabilization measures on the Central American and Caribbean countries, in particular, the direct impact, defined as the impact on social and economic indicators that can be assumed to be directly related to economic policies. The years 1980 and 1990 will be compared. In many countries of the region, structural adjustment implied a severe cutback in government expenditure on social services such as health and education (Evans et al., 1995).9 With respect to health, longevity (female life expectancy divided by male life expectancy) is an important indicator. Very small differences in relative attainments can be noticed between 1980 and 1990 (see Table 6.4 again). Most notable are a relative improvement in Nicaragua and a decline in El Salvador. In both countries, however, the 1990 figure for relative female life expectancy is well above 100, probably due to the war situation, which reduced life expectancy for men more than for women. An indicator that reacts rapidly to changes in health conditions is the maternal mortality rate. In all countries with very low or negative growth rates in the 1980s (except one), this rate deteriorated or remained at the same level (see Tables 6.5 and 6.7). The largest increases (deterioration) were registered in Jamaica, Guatemala, El Salvador, and Trinidad and Tobago. In Haiti a small reduction could be registered, but the mortality rate was and is very high in this country. Nicaragua is the only country of the region where maternal mortality decreased significantly in spite of very low rates of economic growth. This can be explained by Sandinista policies to improve basic health care, especially in the first part of the 1980s. It shows that an economic crisis does not necessarily lead to a deterioration of basic health care, nor does (low) positive growth necessarily lead to a maintenance of basic health standards. In three out of the five countries with positive growth rates in the 1980s, Costa Rica, Panama and Cuba, maternal mortality also decreased, but in Honduras and Jamaica it did not (Table 6.7). In most countries, the reduction in government expenditure in education did not prove to have led to a reduction in relative female school enrolment: relative enrolment rates increased in Haiti, El Salvador, Honduras and Nicaragua. They decreased, however, in

A. Geske Dijkstra 129

Costa Rica and (slightly) in Jamaica. It is remarkable that these are the countries where stabilization and adjustment policies were taken and where these policies led to positive growth rates in the second half of the 1980s. Of the two countries with low relative enrolment rates in 1980, Guatemala and Haiti, Haiti improved performance significantly while these levels remained very low in Guatemala. Studies of the region that examine the impact of structural adjustment on women have shown that more women began to participate in the labour market as a result of crisis and adjustment. This has been shown, for example, for Jamaica and the Dominican Republic (Safa and Antrobus, 1992), for Nicaragua (Pérez-Alemán, 1992), for Costa Rica (Gindling, 1993; Tardánico, 1993) and for Central America in general (Fletcher and Renzi, 1994). Increased male unemployment and/or lower (male) real wages forced women to look for paid work. This increased female labour market participation is confirmed by our figures on relative activity rates (Tables 6.6 and 6.7). The increased relative female labour market participation is strongest in Guatemala, Honduras,

Table 6.7 Improvements in indicators between 1980 and 1990, by country (in per cent) GDPa

Costa Rica El Salvador Guatemala Honduras Nicaragua Panama Cuba Dominican Republic Guyana Jamaica Trinidad & Tobago Haiti a b

2.4 0.1 0.9 2.4 1.3 0.7 2.3 2.6

Contraceptive use

3.6 37.5 26.7 37.5 73.1

23.8

3.4 2.5 1.9

16.7 2.2

0.4

50.0

Share in parliament

9.1 166.7 28.6 140.0 6.7 16.7 32.4 100.0

Maternal mortality rateb

Relative economic activity rate

Occupational segregationb

28.6 78.9 108.3 42.7 45.8 17.8 46.7 36.4

2.7 1.4 21.5 24.6 23.2 4.7 8.1 23.6

18.2 15.6 18.2

219.4 63.3

4.4 0.6 5.4

9.1 4.8

7.4

8.3

2.4

0.0 20.0

11.5

Average annual growth rates 1980–90. Positive figures mean improvement in maternal mortality rate or segregation, so decline.

Sources: For GDP: elaboration of World Bank Tables, except for Cuba; for other indicators and Cuba’s GDP growth: elaboration of WISTAT Data.

130 Crisis, Adjustment and the Dynamics of Gender Relations

Nicaragua and the Dominican Republic. Haiti is the only country where relative female participation decreased, but starting from a high figure. Although an increased female participation rate is often seen as negative, an increase in this relative figure can be considered positive. If the female activity rate increases more than the male activity rate, it means that, at least, relatively more women participate in the registered labour market than before. It is not clear to what extent this is the result of an ongoing trend, or of crisis and adjustment. It is often stated that increased participation of women in paid work led to an increased work burden for women, since an equal sharing of unpaid work between men and women lags behind. Although there are no systematic data available on time use by men and women, the increased workload has been found in several studies.10 For Jamaica and the Dominican Republic, Safa (1995) found that an increased burden for women was often shared with women of other generations: mothers or daughters. Dierckxsens (1996) cites studies that show the same phenomenon for Costa Rica. In an interesting study of rural households in Guatemala, Katz (1995) found that increased female participation in paid work and in the production of non-traditional export crops is related to the presence of older daughters in the household. In Nicaragua, the closure of childcare centres after 1988 increased the workload for women (Pérez-Alemán, 1992). Studies elsewhere have established that in periods of economic crisis, women tend to have less bargaining power over the use of household income (Aslanbegui et al., 1994). Unfortunately, no data are available on the distribution of income within the household. What is clear, however, is that if women respond to higher incentives and begin to participate in the production of tradables as opposed to non-tradables, it cannot be concluded that women will also dispose over additional income. The study by Katz cited above found that the production of export crops was still seen as a male activity in spite of an extensive female workload in it. The additional income from these crops did not lead to increased purchases of ‘female’ goods such as household utensils (Katz, 1995). Although more women participate in the labour market, this does not mean that they have an equal position in that labour market. One of the expected consequences of crisis and adjustment is that women’s relative wages are reduced: because of their limited mobility due to household and childcare chores, their lower education and fewer command of resources, they tend to be occupied more in jobs with lower wages, more in the informal sector and, in particular, more in the lower-paid segment of the informal sector. In a comparative study of

A. Geske Dijkstra 131

Latin American and Caribbean countries, Psacharopoulos and Tzannatos (1992) found that, indeed, more women than men work in the informal sector. At the same time, the percentage of women employees in the total labour force has increased in most countries. This is consistent with our positive interpretation of the fact that relative female participation in the registered labour market increased (Table 6.6). Funkhouser (1996) also reports that women tend to be more (than men) occupied in the informal sector in Central America. In Central America, the male/female wage differential proved to be much higher in the urban informal sector than in the urban formal sector. This difference was smallest in Nicaragua (Table 6.8). The male/female wage gap in the urban formal sector is not so high, but still considerable (except for Honduras in 1985) if one takes into account that the average level of education of women in the formal sector is higher than that of men occupied in the formal sector.11 In Costa Rica and Nicaragua the wage gap decreased in both sectors, while it increased in El Salvador. In Honduras the gap decreased in the informal sector, but came into being in the formal sector. In almost all countries of the region occupational segregation decreased in the 1980s (Table 6.6). The largest decreases were registered in Guatemala, Costa Rica, El Salvador and Panama. For most Caribbean countries no comparison over time is possible. In Trinidad and Tobago, occupational segregation increased slightly in this period, but it was rather low at the outset. By 1990, the differences between Central America and the Caribbean seemed to have become smaller, although Honduras still featured high segregation (no 1980 figure was available for this country). For Central America, we may conclude that crisis and

Table 6.8 Relative female/male hourly wages in urban formal and urban informal sector, Central America Country

Formal sector 1980

Costa Rica El Salvador Guatemala Hondura Nicaragua

91

Informal sector

1985

1991

1980

1985

1991

94 96

98 92 112 94 90

55

55 57

72 55 59 58 78

106 89

49 76

Source: Elaboration of data presented in Funkhouser (1996) based on household surveys.

132 Crisis, Adjustment and the Dynamics of Gender Relations

adjustment did not prevent a decrease in occupational segregation from coming about. At this level of aggregation, there was a trend toward a degendering of occupations. In sum, relative female labour market participation increased and occupational segregation decreased in most countries.12 From these figures, we cannot conclude that vertical segregation also decreased. But the decreasing wage gap in the informal sector in three out of four Central American countries, seems a positive development in this respect. Unfortunately, no systematic data were available for some crucial variables, in particular time use of men and women, in order to assess the impact of crisis and adjustment. From the data we could present, it seems that there was no systematic increase in gender inequality. With respect to relative social indicators, no country registered a serious decline although in Costa Rica women lost their relative advantage in school enrolment. Crisis and adjustment do seem to have led to higher maternal mortality rates in most countries, pointing to a deterioration of basic health care. However, since Nicaragua could escape this deterioration in spite of economic crisis, it also points to a low priority for mother and childcare in most countries. This may be a sign of continuing gender inequality. Relative female participation in the labour market increased and occupational segregation decreased. For Central America, there was more evidence of a reduction in the male/female wage gap than of an increase.

Changes in gender equality over time Now we turn to the question of what happened to some other variables related to gender equality during the 1980s, a decade of crisis and adjustment. I examine indicators that can be considered, at best, indirect effects of crisis and structural adjustment, and that are probably to a large extent influenced by other factors. Most indicators improved between 1980 and 1990 in the countries for which these years can be compared. Expectations with respect to the impact of the crisis on contraceptive use and fertility are mixed. Some argue women respond to an economic crisis by having more children. The higher workload leads to less breastfeeding, and, if there is an increased demand for women’s time, children provide help (Palmer, 1992). On the other hand, Sparr (1994) concluded that structural adjustment leads to changes in the household structure and, in particular, to delayed marriage. Forced by the economic crisis, women postpone or reduce childbearing.

A. Geske Dijkstra 133

In fact, fertility rates in the region declined (Table 6.2). Whether this was the result of economic crisis or of an autonomous cultural trend, remains to be seen. Average fertility was in 1990 still remarkably higher in Central America than in the Caribbean. Only in non-English speaking Caribbean (Dominican Republic and Haiti) is the fertility rate still above 3 per cent, while it is above 3 in all Central American countries. The influence of the (Spanish) Catholic tradition still seems to be strong. If there was an effect of the economic crisis on declining fertility, this was probably strongest in urban areas: in urban areas children represent a cost, while they may be of help in rural areas. Indeed, there seems to be a relationship with the degree of urbanization: countries with lower urbanization show a smaller reduction in fertility rates. The use of contraceptives has increased even more than fertility rates were reduced (see Table 6.2 again). Although the economic crisis may have played a role in a reduced desire for children, this same crisis has at least not reduced the accessibility of contraception. And a cultural trend seems to be going on in the region according to which women get more control over their bodies. The powers of the church and of tradition, which were against the use of contraceptives, seem to be fading away. Most notably this is evident in Spanish-speaking countries like Nicaragua, El Salvador, Honduras and the Dominican Republic. The country with the largest jump in use of contraception is Nicaragua, probably due to Sandinista revolutionary rule in the 1980s. Health policies and income distribution have made contraceptives accessible to a wider group of women. Panama, Costa Rica and Jamaica apparently had already passed through this process of modernization before 1980. Some other countries still lagged behind in the 1990s, in particular Haiti and Guatemala. Cuba, for which no 1980 data are available, has the highest score of all countries in 1990. In that country, socialism reduced the influence of the Catholic Church at an early stage, and health policies made contraception available on a large scale. In most countries, the trend toward more urbanization continued in the 1980s. The exceptions are Panama and Costa Rica, where in 1990 a higher percentage of the population lived in rural areas than in 1980. Probably, the reduction in urban employment and in real wages has induced migration to rural areas. This is consistent with the fact that there is more extreme poverty in urban than in rural areas in Costa Rica, contrary to the situation in other Central American countries (Pérez and Pichardo, 1994). Between 1985 and 199413 female representation in parliament also increased slightly in most countries, except for Cuba, where it fell.

134 Crisis, Adjustment and the Dynamics of Gender Relations

However, female representation in parliament is still very low in most countries. The scores for Guyana are peculiar. Very high scores on female parliamentary representation are combined with average scores on social indicators and the labour market, and with very low figures on the availability of contraceptives. Perhaps this can be explained by a high inequality among women. It is interesting to note that increases in contraceptive use went faster than improvements in other indicators like participation in the labour market and political representation. Nevertheless, most indicators of gender equality registered an improvement in the 1980s for most countries of the region. We must conclude that the economic crisis experienced by most countries in the (early) 1980s, and the economic austerity measures that accompanied the structural adjustment programmes do not seem to have prevented a general trend towards more gender equality in the region. This trend is particularly evident in the use of contraceptives. However, it is still possible that gender equality would have improved much more without crisis and adjustment in the 1980s.

Conclusions This chapter examined the dynamics of gender relations in Central America and the Caribbean. The main focus is on the period between 1980 and 1990, in which most countries experienced economic crisis and carried out stabilization measures. The chapter analyzes gendered statistics of 1980 and 1990 for the region, in order to see whether there is some relationship between economic crisis and adjustment, and gender inequality. The impact of structural reforms cannot yet be measured, since most countries only began reforms towards the end of the decade. From this combined longitudinal and cross-section approach with a limited number of countries, it is difficult to draw general conclusions. This can be considered a disadvantage. However, the limited number of observations means that there still is an image of a country behind the statistical figure. Given the enormous amount of factors and variables that may play a role, case studies of countries were used to help interpreting macro data and to identify meaningful relationships. A first conclusion that can be drawn is that, on average, there was somewhat more gender equality in the Caribbean countries than in Central America in 1980. This difference was particularly evident in the labour market and in the availability of contraceptives, but Central

A. Geske Dijkstra 135

America achieved some ‘catching up’ on these indicators between 1980 and 1990. In most countries, there is not much gender difference in school enrolment and in life expectancy, although women lag behind in Haiti and Guatemala. In all countries, women are hardly present in parliaments, with Cuba and Guyana as positive exceptions. A second conclusion is that the economic crisis and adjustment (or in fact, stabilization) measures of the 1980s have not led to a consistent decline in indicators for gender equality (Table 6.7). Relative labour market participation has improved, and with respect to relative social achievements there is either no change or some improvement. Contraceptive use has increased (except for Trinidad and Tobago), which shows that women have achieved more autonomy over their bodies. This seems mainly a result of a cultural trend, but, at least, this trend has not been reversed by the economic crisis. On the other hand, increased female participation in politics seems to proceed very slowly in the region. Percentage increases are large for some countries (Table 6.7), but they started from a very low base. Maternal mortality rates increased in many countries, which points to serious effects of the crisis on women’s welfare. The, by and large, improved gender equality between 1980 and 1990 can probably be explained by structural and cultural trends, and much less by economic policies. In this respect, the time frame for this study has been too short. The impact of crisis and adjustment should ideally be established by looking at deviations from a long-term trend. Looking at country experiences in more detail, this chapter shows that women’s relative position seems to be worse in Guatemala and Haiti, with low contraceptive use, lower relative social achievements for women and very high maternal mortality rates. However, in spite of the severe economic crisis in the 1980s in Haiti, relative female enrolment rates increased and there was a slight reduction in maternal mortality rates. The effects of economic crisis and adjustment seem to have been most severe for women in Trinidad and Tobago. Gender equality was at a relatively high level in 1980, but both occupational segregation and maternal mortality rates increased, and it was the only country where the use of contraceptives declined in the 1980s. The crisis had least effect on the relative situation of women in Nicaragua: this country registered improvements in all available relative indicators. In Costa Rica and Panama, all indicators improved (Table 6.7) but these countries were less affected by economic crisis in the 1980s. The achievements of Costa Rica may be promising, since this was the only country in the region that implemented structural reforms in the 1980s.

136 Crisis, Adjustment and the Dynamics of Gender Relations

Apparently, these reforms did not prevent women from improving their relative position. In so far as data are available, Cuba had the best performance of the region. But in this country the economic crisis began after the decade analyzed here. The relatively high gender equality in Nicaragua (in spite of severe economic crisis) and the good performance of Cuba point to the importance of public policies. In particular, policies that give priority for providing basic health and education, and policies to improve the legal framework with respect to gender relations (family laws, antidiscrimination laws) can be assumed to contribute to gender equality. Countries with very low public expenditure for social services in general and with high-income inequality, such as Haiti and Guatemala, also have the highest gender inequality. This region seems to confirm the relationship between overall income distribution and gender equality that was also found in another study. Another factor that has probably influenced gender equality is the strength of the women’s movement. As far as Central America is concerned, this movement has been rather strong in Nicaragua and Costa Rica, much weaker in other countries and virtually absent in Guatemala. A final conclusion is that, somewhat surprisingly, the initial level of gender inequality was of little influence in the gendered impact of crisis and structural adjustment policies. Relative scores decreased most in Trinidad and Tobago, which had rather high gender equality in 1980. In other countries gender equality improved in spite of crisis and adjustment. This reflects that gender relations are not only influenced by economic policies or developments, but also by other factors such as relative female power, cultural factors, and other state policies. In view of this, the idea of the economy as a ‘gendered structure’, although analytically helpful for the study of women’s relative position at a certain point in time, may be too static. The gendered structure is constantly moving. Far more longitudinal research is necessary in order to examine the interactions between different dimensions of gender equality.

Notes 1. Costa Rica is the exception in starting earlier (see below). 2. Other sources cast doubt on the relationship between slavery and labour market participation. In Brazil, for example, liberation of slaves meant that women and children withdrew from the labour market. See Reid Andrews (1991). 3. For example, Elson et al. (1997) analyzes gender relations at micro, meso and macro levels for five Central American countries, but contains hardly any comparisons over time.

A. Geske Dijkstra 137 4. Some authors argue that the use of contraception may reduce women’s power over their bodies since men use it as an excuse to force women to sexual intercourse. However, it seems that contraceptive use in itself is neutral in this respect: rape can occur with or without contraception; the difference is that with contraception the possibility of becoming pregnant is minimized. 5. As in UNDP (1995) for the construction of the Gender-Related Development Index, the maximum for women was set at 87.5 and for men at 82.5. 6. Relative female/male enrolment figures of above 100 may indicate scores of above 100 for female enrolment. This is not as positive as it seems, since it may be due to the presence of girls older than ‘normal school age’ in primary or secondary school. (Enrolment is defined as number of school attendees divided by number of total population of certain age.) 7. Female economically active population/total female population, divided by male economically active population/total male population. 8. The following nine occupational categories were distinguished: professional, technical and related workers; administrative and managerial workers; clerical and related workers; sales workers; service workers; miners quarrymen and related workers; agricultural, animal husbandry, forestry, fishing and hunting; production and transport operators and labourers; not defined or classified, unemployed and armed forces. 9. The countries studied were Costa Rica, Honduras, Nicaragua, Panama, Dominican Republic, and Jamaica, and the only country where this expenditure did not decrease was Panama. 10. Some of these are cited in Escalante (1997). 11. In the informal sector, average years of education of women is below that of men (Funkhouser, 1996). 12. The WISTAT figures for both economic activity rates for the distribution among occupational groups are taken from ILO data (Yearbook of Labour Statistics), and the total female labour force is the same in both. This means that one can indeed conclude that higher participation has been accompanied by less segregation. 13. Data for 1980 and 1990 were not available, so figures for 1985 and 1994 are presented.

References Agarwal, Bina (1995) ‘Bridging a Critical Gap in Economic Analysis and Policy’, in Edith Kuiper, Jolande Sap, with Susan Feiner, Notburga Ott and Zafiris Tzannatos (eds), Out of the Margin, London: Routledge. Aslanbegui, Nahid, Steven Pressman and Gale Summerfield (eds) (1994) Women in the Age of Economic Transformation, London: Routledge. Benería, Lourdes and Shelley Feldman (eds) (1992) Unequal Burden: Economic Crisis, Persistent Poverty, and Women’s Work, Boulder, Co.: Westview Press. Bolles, A. Lynn (1991) ‘Surviving Manley and Seaga: Case Studies of Women’s Responses to Structural Adjustment Policies’, Review of Radical Political Economics, vol. 23.

138 Crisis, Adjustment and the Dynamics of Gender Relations Buttari, Juan J. (1992) ‘Economic Policy Reform in Four Central American Countries: Patterns and Lessons Learned’, Journal of Interamerican Studies and World Affairs, vol. 34. Deere, Carmen Diana, with Peggy Antrobus, Lynn Bolles, Edwin Meléndez, Peter Phillips, Marcia Rivera and Helen Safa (1990) In the Shadows of the Sun: Caribbean Development Alternatives and US Policy, Boulder, Co.: Westview Press. Dierckxsens, Wim (1996) ‘Impacto del ajuste estructural sobre la mujer trabajadora en Costa Rica’, in Thera van Osch (ed.), Nuevos Enfoques Económicos: Contribuciones al Debate sobre Género y Economía, San José, Costa Rica: Embajada Real de los Países Bajos. Dijkstra, A. Geske (1992), Industrialization in Sandinista Nicaragua: Policy and Practice in a Mixed Economy, Boulder, Co.: Westview Press. Dijkstra, A. Geske (2000) ‘A Larger Pie Through a Fair Share? Gender Equality and Economic Development’, Institute of Social Studies (ISS) Working Paper Series No. 315, The Hague: ISS. Dijkstra, A. Geske and Lucia C. Hanmer (2000) ‘Measuring Socio-Economic Gender Equality: Towards an Alternative for UNDP’s GDI’, Feminist Economics, vol. 6. Eckstein, Susan (1997) ‘The Limits of Socialism in a Capitalist World Economy: Cuba Since the Collapse of the Soviet Bloc’, in Miguel Angel Centeno and Mauricio Font (eds), Toward a New Cuba? Legacies of a Revolution, Boulder, Co./London: Lynne Rienner. Elson, Diane (1995) ‘Male Bias in Macro-Economics: The Case of Structural Adjustment’, in Diane Elson (ed.), Male Bias in the Development Process, 2nd edn, Manchester/New York: Manchester University Press. Elson, Diane and Rosemary McGee (1995) ‘Gender Equality, Bilateral Program Assistance and Structural Adjustment: Policy and Procedures’, World Development, vol. 23. Elson, Diane, María Angelica Fauné, Jasmine Gideon, Maribel Gutiérrez, Armida López de Mazier and Eduardo Sacayón (1997) Crecer con la Mujer: Oportunidades para el Desarrollo Económico Centroamericano, San José: Embajada Real de los Países Bajos. Escalante, Ana Cecilia (1997) ‘Las relaciones entre las mujeres y el poder en el Gran Caribe’, Ciencias Sociales, vol. 76 Evans, Trevor, Carlos Castro and Jennifer Jones (1995) Structural Adjustment and the Public Sector in Central America and the Caribbean, Managua: Coordinadora Regional de Investigaciones Económicas y Sociales (CRIES). Fletcher, Sylvia and María Rosa Renzi (1994) Democratización, Desarrollo e Integración Centroamericana: Perspectivas de las Mujeres, Tomo I, San José: Programa de las Naciones Unidas para el Desarrollo (PNUD). Funkhouser, Edward (1996) ‘The Urban Informal Sector in Central America: Household Survey Evidence’, World Development, vol. 24. Gindling, Thomas H. (1993) ‘Women’s Wages and Economic Crisis in Costa Rica’, Economic Development and Cultural Change, vol. 41. Katz, Elizabeth G. (1995) ‘Gender and Trade within the Household: Observations from Rural Guatemala’, World Development, vol. 22. McLaren, Angus (1990) A History of Contraception: From Antiquity to the Present Day, Oxford, UK, Cambridge, Mass.: Blackwell.

A. Geske Dijkstra 139 Palmer, Ingrid (1992) ‘Gender Equity and Economic Efficiency in Adjustment Programmes’, in Haleh Afshar and Carolyne Dennis (eds), Women and Adjustment Policies in the Third World, London: Macmillan. Palmer, Ingrid (1995) ‘Public Finance from a Gender Perspective’, World Development, vol. 23. Pérez, Laura and Arlette Pichardo (1994) Pobreza en el istmo Centroamerciano: Perspectivas de las mujeres, Tomo II, San José: PNUD. Pérez-Alemán, Paola (1992) ‘Economic Crisis and Women in Nicaragua’, in Lourdes Benería and Shelley Feldman (eds), Unequal Burden: Economic Crisis, Persistent Poverty, and Women’s Work, Boulder, Co.: Westview Press. Psacharopoulos, George and Zafiris Tzannatos (1992) Women’s Employment and Pay in Latin America: Overview and Methodology, World Bank Regional and Sectoral Studies, Washington, DC: The World Bank. Rawlins, Joan M. (1987) ‘Sexuality, Contraception and the Family’, paper presented at First Interdisciplinary Seminar of the Women and Development Studies, University of the West Indies, Mona, Kingston. Reid Andrews, George (1991) Blacks and Whites in Sao Paulo, Brazil 1888–1988, Madison: University of Wisconsin Press. Safa, Helen I. (1995) The Myth of the Male Breadwinner: Women and Industrialization in the Caribbean, Boulder, Co.: Westview Press. Safa, Helen I. and Peggy Antrobus (1992) ‘Women and the Economic Crisis in the Caribbean’, in Lourdes Benería and Shelley Feldman (eds): Unequal Burden: Economic Crisis, Persistent Poverty, and Women’s Work, Boulder, Co.: Westview Press. Smyth, Ines (1996) ‘Gender Analysis of Family Planning: Beyond the Feminist vs. Population Control Debate’, Feminist Economics, vol. 2. Smyth, Lois M. and Alfred Padula (1996) Sex and Revolution: Women in Socialist Cuba , New York/Oxford: Oxford University Press. Sparr, Pamela (1994) ‘Feminist Critiques of Structural Adjustment’, in Pamela Sparr (ed.), Mortgaging Women’s lives, Feminist Critiques of Structural Adjustment, London/New York: Zed Books. Sugarman, David B. and Murray A. Straus (1988) ‘Indicators of Gender Equality for American States and Regions’, Social Indicators Research, vol. 20. Tardánico, Richard (1993) ‘Dimensions of Structural Adjustment: Gender and Age in the Costa Rican Labor Market’, Development and Change, vol. 24. Tzannatos, Zafiris (1990) ‘Employment Segregation: Can We Measure It and What Does the Measure Mean?’, British Journal of Industrial Relations, vol. 28. UNDP (United Nations Development Programme) (1995) Human Development Report 1995, New York/Oxford. UNDP (1997) Human Development Report 1997, New York/Oxford. Waylen, Georgina (1996) ‘Analyzing Women in the Politics of the Third World’, in Haleh Afshar (ed.), Women and Politics in the Third World, London/ New York: Routledge. World Bank (1995) Toward Gender Equality: The Role of Public Policy, Washington, DC: The World Bank. World Bank (1997) World Development Report 1997, Oxford: Oxford University Press with the World Bank. Wierinja, Saskia E. (1997) ‘A Reflection on Power and the Gender Empowerment Measure of UNDP’, mimeo, Institute of Social Studies, The Hague.

7 Economic Policy and the Environment: Structural Adjustment and Prospects for Sustainable Natural Resource Management in Central America Ruerd Ruben

Introduction Central America1 is commonly depicted as a region where structural adjustment policies have been widely applied, occasioning an important amount of adverse environmental effects (Segura, 1992; De Zeeuw et al., 1997). On the other hand, both governments and civil society organizations profess a strong commitment to creating a strategic alliance for enhancing sustainable development in the region (Ascher and Hubbard, 1989). Two major contradictions can be observed: one between a public discourse in favour of sustainable management of the natural resource base (i.e. land, water, forests) and the practical policy measures that frequently lead to disincentives for sustainable land use by primary producers; and another between the macroeconomic policies and microeconomic farmers’ response to incentives (Goodman and Redclift, 1991). During the recent past, environmental degradation and depletion of natural resources has strongly increased in Central America. Soil erosion, pasture degradation, biocide emissions into the environment, and deforestation all showed significant rising tendencies. Macroeconomic and sectoral policy measures have a significant impact on the conditions for resource management. While monetary and fiscal policies under structural adjustment may create some opportunities for improved resource management, prevailing market and institutional failures prevent farmers from reaping the benefits. Deficient markets for labour, credit and land, high transaction costs on input and commodity markets, as well as the high risks, short time horizons and 140

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insecurity of land rights limit prospects to improve resource management practices. In addition, the reduction of public investment and the reform of the state apparatus for agricultural extension and research further affected the prospects for technological change. Private arrangements of contract farming and sharecropping therefore become increasingly relevant to guarantee access to markets and technology. Throughout the 1980s and 1990s, most Central American countries implemented far-reaching macroeconomic and agricultural sector reforms to deal with short-term economic imbalances and structural distortions in their economies. While aiming at stabilization and growth, these policies have an important impact on the process of agricultural and rural development through (i) adjustment in cropping patterns and production technologies, (ii) reduced availability of mineral fertilizers, and (iii) changing profitability of soil conservation investment. However, macroeconomic policy reforms created by no means sufficient conditions to enhance sustainable land use. Persistent poverty excludes some social groups from benefiting from reforms, while market and institutional failures (i.e. scarce infrastructure, lack of secure property rights, absence of capital and insurance markets) appear as major constraints for the ‘transmission’ of incentives towards resource-poor farm households. The purpose of this chapter is to examine the effects of macroeconomic policy reforms and different policy instruments generally applied by Central American governments on the conditions for sustainable natural resource management. Adjustment of the exchange rate, elimination of subsidies and reduction of the government budget, accompanied by market liberalization and privatization of former public services, represent the major components of the structural adjustment package. While some of these measures (e.g. market reform) could offer in principle certain incentives for improving natural resource management, other components of the package (e.g. privatization of the financial system) clearly lead to a reduction of the available budget for investment in maintenance of the resource base. Moreover, the strong differentiation between different types of rural households (landlords, small peasantry, and landless labourers) implies that income and employment effects are unequally distributed. This chapter analyses the Central American process of macroeconomic policy reform and the consequences for natural resource management at farm household level. Section 2 briefly reviews the major tendencies regarding natural resource depletion in Central America, focusing on aspects of land use, nutrient balances, and environmental

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externalities. In section 3, the impact of macroeconomic policies and structural adjustment programmes on natural resource management regimes is discussed, followed in section 4 by an appraisal of more specific policy instruments to control resource depletion. Section 5 reviews the effectiveness of different policy instruments to enhance sustainable land use at farm household level, making use of a bioeconomic modelling framework. Section 6 summarizes the main conclusions and outlines the perspectives for economic policies that could contribute to more sustainable resource management.

Natural resource degradation in Central America Central America is usually depicted as a region with a relatively rich availability of natural resources. After the Spanish conquista, the absence of precious metals was readily noted and thus the region was rapidly incorporated in the colonial system for the supply of agroexport commodities (indigo, cocoa, hides). After independence, coffee, cotton, sugar cane and bananas appeared as new export crops particularly suited to the prevailing climatic conditions. The rapid growth of agro-export production strongly enhanced the process of national integration and the linkages of the regional economy with the world market. This export-led development pattern resulted in an outwardoriented character of the economy, sustained by authoritarian political forces that maintain their power through a rural production structure based on agrarian dualism (Bulmer-Thomas, 1987). The availability of natural resources, combined with a relatively low population density (with the exception of El Salvador), is generally considered as the major comparative advantage. An important part of the soils are volcanic formations with a high natural fertility. There is a considerable genetic diversity in terms of plant and animal species. About 30 per cent of land cover still consists of primary or secondary forests, but deforestation advances rapidly (Table 7.1). Agricultural development is mainly limited by two factors: (i) the topography of almost 60 per cent of the regional territory consists of fragile hillside areas, and (ii) an increasing share of the regional area – estimated at 28 per cent of the available land – suffers from aridity (i.e. low rainfall and high evapotranspiration). The expansion of dryland area and the threat of erosion in the hillsides imply that land available for intensive arable cropping activities is limited (Dixon et al., 1989). Agricultural development has been based for centuries on extensive growth through expansion into the agrarian frontier, while intensive

Ruerd Ruben 143 Table 7.1 Central America: degradation of natural resources Country

Deforestation (annual loss forest cover; 1980–90)

Soil erosion (percentage of land area)

Hillside area (percentage of cropping area)

Costa Rica Nicaragua Honduras El Salvador Guatemala

3.9 3.7 3.6 3.5 2.3

17 5–10 7 45 25–35

61 45 48 84 81

Sources: Leonard (1986); IICA (1991b).

growth (i.e. increasing yields through better input applications) has been almost neglected. This began to pose severe problems when population growth was consistently higher than agricultural productivity growth, resulting in declining food availability per capita. Food security could be guaranteed only with substantial cereal imports and donations, favouring especially urban consumer groups. Incentives for small rural producers to improve agricultural productivity are generally scarce. Consequently, an important part of agricultural production for the domestic market is accompanied by soil mining practices. The first comprehensive inventory on the degradation of the natural resource base in Central America was undertaken by the International Institute for Environment and Development (IIED). This so-called regional environment profile acknowledged the following major trends during the last decades (Leonard, 1986):

reduction of the area with forest cover from 61 per cent in 1950 to less than 40 per cent of total land use in 1980, representing an annual deforestation of about 3,500 km2 equivalent to 2.9 per cent of the total forest area; loss of arable land due to soil erosion, affecting about 28 per cent of the regional territory (especially severe in the Pacific region), with an annual soil loss estimated between 5 and 35 ton/ha; degradation of watersheds caused by deforestation, runoff and sedimentation, leading to problems of floods and the reduction of the capacity for hydropower production; contamination of rivers and groundwater by pesticides and other agrochemicals used in agro-export production (bananas) and by waste from agroindustrial plants (coffee);

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degradation of pasture areas caused by soil structure hardening and the consequent disappearance of permanent grasses that lead to a reduction of the stocking rate; reduction of fisheries reserves caused by the degradation of coastal areas (mangroves) and their excessive exploitation by a fleet of modern, industrial trawlers.

The above-mentioned processes of natural resource degradation can be related to a number of general development tendencies. The most important structural determinants of the overexploitation of the environment can be summarized under the following headings (Barrantes and Castro, 1996; Walker et al., 1997): (a) Population dynamics Two opposing tendencies can be registered, one of frontier migration and colonization into former forestry reserves, and another of strong urbanization. Both tendencies are explained by the limited access to arable land for (subsistence) cropping activities, the apparent constraints for small farmers to accumulate wealth, and the absence of sufficient rural employment opportunities. Small and medium-size peasants mainly resort to frontier migration, while landless peasants and tenants are more likely to migrate towards urban areas to be involved in informal sector activities. Moreover, outward migration to the United States also occurs, generating an important stream of remittances back to the countryside (Montes, 1989). Finally, migration between Central American countries has been historically important, especially the settlement of Salvadorian farmers in the Occidental region of Honduras, representing a motive for the so-called soccer war between both countries (Durham, 1988). (b) Agrarian dualism The historical legacy of large farms dominating more dynamic agroexport activities (i.e. cotton, sugarcane, coffee, livestock) and a marginalized peasantry with precarious land ownership rights engaged in food production for the local market offered limited scope for sustainable land management (see Table 7.2). Patterns of land use experienced a gradual transformation, characterized by a continuous increase of the pasture area (28 per cent of land use in 1990), a reduction of the forest land and a declining area devoted to annual food crops (i.e. maize, beans and rice). The latter tendency, combined with the very slow average increase of yields in arable cropping (only 0.88 per cent annual

Ruerd Ruben 145 Table 7.2 Agrarian structure, land resources and agricultural yields Country

Arable land per capita (ha.)

Small producers (share of farm land)

Land suitable for cropping activities (% of total area)

Cereal production per capita (annual change, 1980–92)

Cereal yields (annual change, 1985–94)

Costa Rica Nicaragua Honduras El Salvador Guatemala

0.16 0.31 0.38 0.13 0.19

38 74 50 85 54

20 11 17 35 17

1.0 3.9 1.0 0.1 0.4

0.96 1.16 0.44 0.86 1.63

Sources: IICA (1991b); FAO (1996).

increase in cereal yields between 1985 and 1996), resulted in a critical food security situation (Sain and López-Perreira, 1997). Land ownership is also subject to some modifications, characterized by a general reduction of leasehold tenancy, an increasing dynamics of land transactions that give rise to more concentrated land ownership, and a higher reliance on sharecropping and contract-farming arrangements especially for the production of so-called non-traditional crops (i.e. pineapple, palmheart, mango, melon, ornamental plants). (c) Institutional deficiencies Government programmes for agrarian development were generally oriented towards commercialized farmers and livestock owners, neglecting hillside agriculture and dryland management. Infrastructure and credit supply were used as major instrument for rural development, looking for an increased application of hybrid seeds, improved genetic contents of livestock races, irrigation and mineral fertilizers. The restricted regional and social coverage of these state-managed integrated rural development programmes implied a strong bias towards medium and large producers. Otherwise, the state almost fully abstained from controlling externalities caused by excessive biocide emissions (banana plantations), water contamination (coffee farms) or deforestation (livestock ranches). (d) Market failures Economic policies favouring agro-export production have been very dependent on input price subsidies. Consequently, input applications

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for most agro-export crops were generally high and incentives for improving input efficiency were almost absent. This is clearly demonstrated by the over-use of fertilizers in cotton and sugarcane production and the extremely low extraction efficiency reached in local sawmills. Otherwise, small and medium-size producers with cropping systems oriented towards the local market faced a clear disadvantage. Reduced farm-gate prices for cereals (maintained through government marketing monopolies and eventually cheap grain imports or donations) and high capital costs led to a purchasing power constraint for the application of sufficient fertilizers to maintain soil nutrient balances (i.e. replenish available stocks of nitrogen, phosphorus and potassium). The degradation of local seed systems for maize and beans also becomes a limiting factor (Wierema et al., 1993). The above-mentioned market and institutional failures have a direct impact on relative factor and commodity prices. Agro-export crops and livestock production received an implicit subsidy, enabling their expansion into marginal areas. Low market prices for cereals offered a disincentive for small producers, even when seeds and agrochemicals received a subsidy. With the subsequent liberalization of domestic markets and further reforms of the financial system promoted during structural adjustment (see section 3), these producers faced higher input costs and started a search for alternative livelihood strategies (e.g. offfarm employment opportunities; contract farming, etc.). Deforestation leads to a general price increase for local energy sources (i.e. fuel wood). Farmers’ investment in soil conservation measures (i.e. ditches, windbreaks, stone hedges) prove to be less attractive as long as returns to capital investment remain low and property rights are not fully guaranteed (Lutz et al., 1994). At the same time, rising opportunity costs of labour make labour-intensive soil-conservation practices less feasible.

Macroeconomic policies Structural adjustment policies promoted in Central America dedicated major attention to adjustment of the exchange rate, market liberalization, control of public expenditure and privatization of rural financial and extension services (Pomareda, 1992). Increasing foreign and fiscal deficits were the principal motives for adjustment. These macroeconomic and sectoral policy measures also have, however, a significant impact on the conditions for natural resource management.

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The devaluation of the exchange rate favours the domestic prices of (non-)traditional agro-export crops, but depresses the relative price of nontradable food crops. Secondly, devaluation makes imported inputs (i.e. fertilizers, pesticides, machinery) more expensive and tends to favour more labour-intensive operations. Consequently, the food/fertilizer price ratio declines (Sain and López-Perreira, 1997) and nutrient applications in food production are likely to be reduced. This effect can be observed in Costa Rica and Honduras, where structural adjustment policies started relatively early (see Table 7.3). Due to higher costs for material inputs, production turned towards more labour-intensive farming practices. Consequently, the wage rate increased and rural selfemployment became relatively less attractive compared with engagement in the labour market. Liberalization of the domestic and regional markets, on the other hand, could reduce the discrimination against food crops and tends to enhance commercial cereal production. This situation is especially relevant for El Salvador and Guatemala where relative land scarcity motivated the maintenance of some price subsidies (Table 7.3). Output price changes for cereals were less severe than input price adjustments, while the rural wage rate became strongly reduced. Therefore, net cereal producing and selling farm households maintained a favourable position compared with net buying households that depend only on wage income. With the (partial) abolishment of subsidies on agricultural inputs, and the elimination of subsidized credit when the former state-owned rural development banks are privatized, a number of simultaneous shifts in the cropping patterns and the applied agricultural production technology occur. Higher agricultural prices are expected to stimulate

Table 7.3 Relative price changes 1980–90a (real prices deflated with IPC; index 1980100) Country

Maize price (farm-gate)

Fertilizer price

Wage rate

Costa Rica Honduras El Salvador Guatemalab

80.8 100.4 61.8 68.8

84.1 116.1 35.3 51.7

102.2 112.2 33.7 34.9

a b

For Nicaragua no consistent time series are available. Refers to 1985–90 period, 1985100.

Source: Wattel and Ruben (1992).

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agricultural production, either through the cultivation of more land (extensification) or the use of more inputs (intensification). Where there is still an agrarian frontier available and when inputs become too expensive, extensive growth with deterioration of nutrient balances is the most probable outcome, either shortening the fallow period between production cycles, or by clearing ecologically fragile land. This is clearly the case in countries like Nicaragua (after the end of the war with the Contras, the agrarian frontier was open again), Honduras (department of Gracias) and Guatemala (department of Petén). In the other two countries (Costa Rica and El Salvador), production increases are mainly achieved through intensified use of mineral fertilizers and modern inputs, permitting a better maintenance of nutrient balances. The removal of price distortions also has a direct effect on cropping patterns. Contrary to what was expected, the production of basic grains (i.e. cereals, beans) hardly increased. Farmers’ response to the liberalization of domestic food markets proved to be dependent on their net demand or supply position on the market. Higher farm-gate prices have a favourable income effect for net selling households, but negative expenditure effects arise for the overwhelming majority of net buying households. Price increases only result in positive incentives for improved input use, when income effects dominate expenditure effects. On the other hand, crops like bananas, coffee, sesame, and other non-traditional commodities increased their participation in agricultural production. Cotton production was strongly reduced after 1985 due to unfavourable international prices and the increasing resistance against pesticides. The expansion of banana production in Costa Rica and Honduras was mainly related to the new markets in Eastern Europe and the former Soviet Union, but these expectations fell short and the area has been now stabilized. Major efforts are now devoted to reduce the excessive pesticide applications in bananas. Small-scale coffee production noted a remarkable expansion in hillside area in Honduras and Guatemala, caused by favourable international prices and several types of national incentives (i.e. bonds, fiscal subsidies). Coffee proved to be an effective activity to enhance the conservation of hillside areas, and partly substitutes former basic grains systems that suffered from soil erosion. In Costa Rica, shadow-based coffee systems are re-established in order to guarantee better soil nutrient management. Most non-traditional crops rely on intensive use of chemical inputs to satisfy international quality standards. Nutrient balances are generally warranted, but commercial margins are rather low (due to the high

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input costs) and market risks are considered fairly high (Weller, 1996; Achong, 1997). While monetary and fiscal policies under structural adjustment may create some opportunities for improved resource management, prevailing market and institutional failures prevent small farmers from reaping the potential benefits. Deficient markets for labour, credit and land, and high transaction costs on input and commodity markets inhibit the adjustment of farming systems and cropping practices. The poor availability of rural infrastructure and the lack of fully developed commercial and delivery networks reduce small farmers’ supply responsiveness to market opportunities. After the privatization of the financial system, rural development banks prove to be reluctant to agricultural lending operations, since these are considered to be far too risky while returns are relatively low compared to lending for commercial and real estate purposes. Usurious local financial systems and the dominance of a few traders make returns on investment in improved input use and land conservation highly uncertain. These ‘real market’ conditions are generally considered as effective constraints for the adoption of sustainable soil management practices (Feder et al., 1985; Hewitt de Alcántara, 1993). Private arrangements of contract farming (finance for non-traditional crops) and sharecropping (used in horticulture crops) become therefore increasingly relevant to guarantee access to markets and technology.

Environmental policies During the last decades, Central American governments have perceived several policies to reduce natural resource depletion. The InterAmerican Institute for Agricultural Cooperation presented the following general framework for policies regarding sustainable resource management (IICA, 1991a; see Table 7.4):

Macroeconomic policies aiming at adjusting relative prices (i.e. floating exchange rates, import levies) in favour of agricultural production, and creating mechanisms for international compensation of nature conservation activities (i.e. debt-for-nature swaps, joint implementation of greenhouse gasses reduction, ecotourism); Sectoral policies to enhance incentives for sustainable agricultural production systems (i.e. fiscal incentives for reforestation, elimination of subsidies on agrochemicals, water pricing, subsidies for soil conservation, tax incentives for investments in perennial crops and non-traditional agriculture);

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Institutional policies to enable the rational use of natural resources (i.e. legal framework for titling, creation of protected areas and biodiversity reserves, territorial planning, protection of genetic resources, etc.); social policies to improve access to knowledge, information and alternative occupations (i.e. rural education, environmental education, technical training, extension networks, ecotourism development).

Within the framework of this chapter we cannot review the whole range of policy alternatives and their possible consequences. In the following, we will therefore concentrate attention on the environmental effects of price reforms and institutional change for the sustainability of small farmers’ production systems. To appraise the prospects of more sustainable farming systems, difference should be made between (i) physical soil conservation and land improvement measures (i.e. stone walls, ditches, hedges, levelling, terracing, draining, etc.) Table 7.4 Economic policies and environmental effects Policy area

General objective

Policy instruments

Environmental implications

Macroeconomic

Adjustment of relative prices

Exchange rate

Mobilization of local resources Domestic investment Returns to rural investment

Sectoral

Specific incentives

Interest rate Trade regime Food price liberalization Water pricing Biocide taxation Tax deduction

Institutional

Improved resource use

Land titling Protected areas Biodiversity control Import licences Territorial planning

Social

Access to resources

Source: Based on IICA (1991a).

Education Employment creation

Input application in food crops Efficient use of water Control on biocides use Long-term investments Soil conservation investment Forest conservation Genetic diversity Reduced biocides use Optimal resource use Willingness to invest Off-farm employment

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that require usually considerable amounts of land and capital inputs, and (ii) modified farming practices (i.e. contour ploughing, cover crops, zero grazing, minimum tillage, etc.) that are characterized as more labour-intensive activities. Lutz et al. (1994) present a comprehensive overview of cost–benefit ratios for a wide number of soil conservation investment strategies (i.e. ditches, terraces, stone and live barriers). While most practices could be, in principle, profitable, adoption is not widespread since expected income gains are easily outweighed by higher risks. Similar evidence is presented by López-Perreira and Sanders (1992) comparing the economic feasibility of different grain cultivation production systems with physical soil erosion control measures. On-site economic evaluation of soil conservation practices in Honduras (Cárcamo et al., 1994) revealed that modest reductions in erosion can be achieved by farmers at little cost by reorganizing production, switching crop rotations and using contour ploughing, while additional investment into physical control measures leads to lower incomes and higher risks. A number of general limitations for sustainable natural resource management practices at the farm household level should be acknowledged as well. Firstly, most improved soil management depends on the use of labour inputs for soil conservation, nutrient recycling and crop maintenance. When labour is scarce or off-farm employment represents an important income source, these practices may become less feasible. Secondly, security of land use or ownership rights is an important condition for investment in land conservation. However, if titling programmes are not accompanied by improved access to rural financial institutions, the effects from these investments are usually delayed. Thirdly, returns to better soil management practices can mostly be reaped only after several years. The short time horizon of small farmers, caused by poverty, may prevent them from undertaking these investments. In addition to these structural limitations, the reduction of public investment and the reform of the state apparatus for agricultural extension and research further affected the prospects for technological change. Privatization of extension services (or their decentralization towards local non-governmental organizations) and the introduction of user fees are now common practices, but there is no real proof that extension became more effective or cost-efficient and in practice the main result is that input costs further rise. Gibson (1996) illustrates the importance of extension and credit services to enable the adoption of improved hillside management practices by Nicaraguan smallholders.

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These can be partly financed by reducing the over-use of chemical inputs that is common for larger producers located in the fertile lowland valleys. Similarly, Mausolff and Farber (1995) discuss the effectiveness of extension through local non-governmental organizations that promote soil management based on indigenous knowledge, reaching the conclusion that external inputs (chemical fertilizers) can be effectively substituted by cover crop systems with velvet beans. However, reduced yields and higher labour demands are mostly acknowledged as impediments for the general diffusion of these low-external input strategies (Ruben et al., 1997).

The effectiveness of policy instruments While general macroeconomic policies can only contribute to the creation of the basic conditions for economic stability and competitive markets, specific policy measures are required to enable the adjustment of small farmers’ production systems and cropping practices. The effectiveness of these policies depends finally on farmers’ microeconomic responses. Therefore, major attention has to be devoted to the identification of suitable incentives that could improve both farm household income as well as the sustainability of the resource base (defined in a strict sense as nutrient balances and biocide emissions), thus guaranteeing that improved resource management also yields a positive income effect. Several policy instruments are available to enhance sustainable management of natural resources. The impact of these policy instruments on land use practices and resource management decisions can be analyzed within a bio-economic modelling framework (Ruben et al., 1994; Kruseman et al., 1995). Supply response analysis of small peasant households’ reactions to different types of economic incentives offers insight into the direction and intensity of adjustments in three major variables: (i) total land use, (ii) cropping pattern (e.g. output substitution), and (iii) input-intensity of technology choice (i.e. input substitution). Bio-economic models permit the determination of the income effects and the sustainability implications of these simultaneously occurring adjustments. For the Atlantic Zone of Costa Rica, simulations were made for the following policy instruments: (i) output price increase, (ii) fertilizer subsidies, (iii) biocide taxation, (iv) reduced transaction costs (caused by public investment in rural infrastructure), and (v) increase in rural wage rates. The effects of these instruments on land use, household

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consumption, fertilizer and biocide applications are reported in Table 7.5. The figures indicate a percentage change in the value of the goal variables induced by a 1 per cent change in the instrument variables. An increase in output prices results mainly in positive income and consumption effects, but hardly influences sustainability indicators. Moreover, the registered decrease in cultivated area can be explained as a perverse response, taking part of the higher income in terms of leisure. Fertilizer price subsidies have a strong effect on technological change, encouraging the adoption of cropping systems that are more efficient in terms of nutrient use and that rely far less on biocides, while improving farm household income. Biocide taxation, on the other hand, reduces land use and total biocide applications, at the expense of reduced consumption opportunities. Public investment in infrastructure to reduce transaction costs has only a limited direct effect on production and sustainability. Similar simulations for other regions with less infrastructure facilities indicate, however, that structural policies enhance the tradability of locally produced goods and are preconditions for an effective application of price policies (Kuyvenhoven et al., 1995). Finally, the wage rate appeared to be an ineffective instrument to enhance sustainable land use within peasant farms that strongly rely on family labour, since wages are both production costs and an income component. The latter conclusion has to be modified for medium-size and large producers that make use of contract labour. Schipper (1996) consistently demonstrated for the same region that the dynamics on the labour market is strongly influencing land use decisions, especially when off-farm employment represents a rising share of farmers’ incomes. Similar evidence is provided by studies on the increasing importance of off-farm employment for the peasant survival strategies

Table 7.5 Simulated farm household responses to policy instruments Indicator

Output Fertilizer Biocide Reduced Wage price price price transaction rate support subsidy taxation costs increase

Land use 0.10 Consumption 0.18 Fertilizer use 0.04 Biocide use 0.02 Source: Ruben et al. (1994).

0.01 0.09 0.57 0.25

0.52 0.08 0.85 1.99

0.06 0.08 0.02 0.01

0.02 0.00 0.01 0.00

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in Honduras, pointing towards the positive expenditure effects on household food security and farm-level input applications (Ruben and Van den Berg, 1997). These results indicate that a more direct involvement of the state in agricultural factor markets, through public investment in market development and occasionally also relying on selective price subsidies for fertilizers, is an important condition to enhance sustainable resource use. Making structural adjustment policies consistent with the objectives of sustainable rural development implies that market liberalization programmes have to be accompanied by a series of targeted policy interventions that focus attention on improved access to factor markets for fertilizers and labour. While the above analysis is more directly focused on policy incentives to reduce nutrient depletion and biocide emissions in arable cropping activities, some remarks can be made regarding other complementary measures to address forest conservation and pasture management. Current high rates of deforestation should be primarily controlled through reduction of the demand for additional land for arable cropping and livestock activities, based on the intensification of their land use practices (i.e. better input applications, higher carrying capacity, and improved fallow systems). When the economy is still in a depression, frontier migration is likely to continue (Maldidier et al., 1997). Otherwise, income from forestry activities can be maintained or even improved with more rational management regimes and efficient processing systems. Fiscal incentives proved to be, however, a far from adequate incentive to enhance reforestation, favouring speculative land transactions and occasioning a clear regressive distribution impact. Input subsidies for planting material and financial support for the initial capital costs of integrated agro-forestry or silvo-pastoral systems and fuelwood plots are considered far more effective. Finally, additional income from forest conservation can be generated with ecotourism activities or under international agreements for the conservation of biodiversity reserves (Pearce and Moran, 1994). The improvement of pasture management is generally considered a more difficult enterprise. Since rent-seeking objectives normally prevail, effective incentives for sustainable pasture use are hard to find (Kaimowitz, 1996; Roebeling et al., 1997). A number of technical solutions for improved pasture and herd management are available (i.e. fodder crops, agro-silvopastoral systems, etc.), but their application is limited to areas of intensive dairy production close to the cities. Again, fiscal incentives (like the Ley de Fomento del Desarrollo

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Agropecuario, FODEA, law in Costa Rica) did not yield the expected results. Land taxation is usually considered as a preferred measure, but its implementation always generates a fierce political opposition. With the establishment of a more competitive land market (combined with a system of mortgage finance enabling the purchase of land by small farmers), we may expect that in the long run land ownership will be transferred from less efficient livestock haciendas towards more efficient intensive cropping activities operated by family farms (see Carter and Mesbah, 1993 for the full argument). A final observation should be made regarding the input-intensity of the desired sustainable cropping systems. Reardon (1995) presented an illustrative comparison of labour-led and capital-led production systems arguing that the former are only able to guarantee sustainable land use at a relatively low output level. Moreover, these so-called low external input systems (i.e. cover crops based on biological nitrogen fixation, biological pest control, manual weeding to substitute herbicides, etc.) mostly rely on high use of labour force and thus reach a lower labour productivity (Heerink and Ruben, 1996). Although the disadvantages of excessive use of external inputs for the environment are well known, a distinction should be made between fertilizer applications (to maintain nutrient balances) and other agrochemicals (for the control of weed, pests and diseases). The latter can be partly substituted by labour operations. Sustainable yields cannot be expected, however, without some reliance on chemical fertilizers, due to their higher efficiency and the options of timely application during the cropping cycle. Otherwise, organic matter management (crop residues, shadow trees) is of fundamental importance to guarantee effective fertilizer use and to prevent leaching and runoff. A successful combination of both elements is required to guarantee sustainable yields in the long run.

Conclusions After several decades of depressed agrarian price policies for the domestic market and the occurrence of severe public and foreign deficits, structural adjustment is considered unavoidable in Central America. The reform package may have contributed to a certain level of macroeconomic stabilization, but it offered no direct guarantees for sustainable management of the natural resource base. There are apparent contradictions between a public discourse in favour of sustainable development and practical policy measures that proved to be occasionally

156 Economic Policy and the Environment

rather harmful to the environment. Moreover, the existing gap between macroeconomic and sectoral policies, and microeconomic response reactions of farmers to these incentives clearly reduced the effectiveness of environmental policies. Low elasticities and sometimes even perverse supply response reactions are registered that indicate the limited impact of economic policy instruments to induce farm households towards more sustainable resource use. Over-exploitation and degradation of natural resources in Central America is related to the process of population growth, stagnating yields, and widely occurring institutional deficiencies and market failures. Agricultural development is strongly based on extensification of land use and labour-led production systems that meet severe limitations in terms of their low factor productivity and critical nutrient balances (i.e. soil mining). Long-term prospects to sustain these already low productivity levels are rather limited when additional investment in yield-increasing inputs and soil-conservation practices is further delayed. Therefore, a simultaneous adjustment is required in the following areas: (i) adjustment of cropping patterns and production technologies, (ii) enhanced application of mineral fertilizers, and (iii) improved profitability of soil conservation investment. Some final conclusions can be drawn regarding the policy measures that could offer better prospects for sustainable resource management at the farm household level. First, for the maintenance of soil nutrient balances, targeted subsidies on mineral fertilizers are considered as a necessary policy device. Full liberalization of the fertilizer market (as proposed by the World Bank) is clearly in contradiction with the objectives of sustainable land use. Direct involvement of the state in agricultural factor markets, through public investment in market development and occasionally also relying on fertilizer price subsidies, is an important condition to enhance sustainable resource use. Secondly, important progress can be reached through the adjustment of input-applications and cropping practices, followed in a later stage by the implementation of physical soil conservation measures. The registered trade-offs between profitability and risks are generally quite large and inhibit early investments in capital-intensive conservation works. Moreover, access to (formal) sources of finance for rural investment has become fairly limited after the privatization of the banking system. Several studies point to the relatively low profitability of soil and water conservation activities under current market conditions. This is especially the case when only on-site effects are taken into account; incorporation of the externalities for downstream effects

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requires an adjustment of pricing procedures that can only be reached with direct community participation and a substantial commitment by the state. Thirdly, the priority sometimes given to labour-intensive soil maintenance activities – favoured especially by local NGOs – may easily meet its limitations when marginal returns to labour decline. This situation is likely to occur when access to complementary inputs (i.e. nutrients, water) is limited and thus production is physically constrained. Reliance on external chemical inputs thus remains a fundamental condition to reach sustainable yield levels. Finally, it has been argued that engagement of rural households in off-farm employment or temporary migration may offer a suitable device to reduce the pressure on the natural resource base and to guarantee access to additional income sources that can be used again for financing farm-level investments into improved resource management. While imperfect access to markets for land and capital is still prevailing, further development of the off-farm labour market may provide effective incentives to enable the transition towards sustainable farming systems.

Note 1. Central America refers here to the following five countries: Costa Rica, Nicaragua, Honduras, El Salvador and Guatemala (excluding Panama and Belize).

References Achong, A. (1997) Ajuste Estructural y Sostenibilidad Agrícola en Panamá: El caso de las exportaciones no-tradicionales, Managua: CRIES, Cuaderno No. 1. Ascher, W. and A. Hubbard (eds) (1989) Recuperación y Desarrollo de Centroamérica, Durham/San José: Duke University. Barrantes, G. and E. Castro (1996) ‘El capital natural en Centroamerica’, Espacios, vol. 7. Bulmer-Thomas, V. (1987) The Political Economy of Central America since 1920, Cambridge: Cambridge University Press. Cárcamo, J. A., J. Alwang and G. W. Norton (1994) ‘On-Site Economic Evaluation of Soil Conservation Practices in Honduras’, Agricultural Economics, vol. 11. Carter, M. R. and D. Mesbah (1993) ‘Can Land Market Reform Mitigate the Exclusionary Aspects of Rapid Agro-Export Growth?’, World Development, vol. 21.

158 Economic Policy and the Environment Dixon, J. A., D. E. James and P.N. Sherman (1989) The Economics of Dryland Management , London: Earthscan Publications. De Zeeuw, H., E. Baumeister, E. Kolmans and M. Rens (1997) Promover la Agricultura Sostenible en América Central, San José, Costa Rica: ICCO/PPM/SIMAS (Interkerkelijk Commissie voor Ontwikkelingssamenwerking/Pan para el Mundo/Sistema de Información y Monitoreo Para la Agricultura Sostenible). Durham, W. H. (1988) Escasez y Sobrevivencia en Centroamérica: Orígenes ecológicos de la guerra del fútbol, San Salvador: UCA Editores. FAO (1996) FAOSTAT Production and Production Indices Yearbook Data, Rome: UN Food and Agricultural Organization. Feder, G., R. E. Just and D. Zilberman (1985) ‘Adoption of Agricultural Innovations in Developing Countries: A Survey’, Economic Development and Cultural Change, vol. 33. Gibson, B. (1996) ‘The Environmental Consequences of Stagnation in Nicaragua’, World Development, vol. 24. Goodman, D. and M. Redclift (eds) (1991) Environment and Development in Latin America: The Politics of Sustainability, Manchester/New York: Manchester University Press. Graaf, J. de (1996) The Price of Soil Erosion: An Economic Evaluation of Soil Conservation and Watershed Development, Wageningen: Wageningen Agricultural University. Heerink, N. and R. Ruben (1996) ‘Economic Approaches for the Evaluation of Low External Input Agriculture’, Tijdschrift voor Sociaal-Wetenschappelijk Onderzoek in de Landbouw , vol. 11. Hewitt de Alcántara, C. (ed.) (1993) Real Markets: Social and Policy Issues of Food Policy Reform, London/Geneva: Frank Cass/UNRISD (United Nations Research Institute for Social Development). IICA (Inter-American Institute for Agricultural Cooperation) (1991a) Bases para una Agenda de Trabajo para el Desarrollo Agropecuario Sostenible, San José, Costa Rica: IICA Serie de Documento de Programas No. 25. IICA (1991b) Centroamérica en Cifras, San José, Costa Rica: IICA/FLACSO. Kaimowitz, D. (1996) Livestock and Deforestation in Central America in the 1980s and 1990s: A Policy Perspective, Jakarta: CIFOR (Centre for International Forestry Research). Kruseman, G., R. Ruben, H. Hengsdijk and M. K. van Ittersum (1995) ‘Farm Household Modelling for Estimating the Effectiveness of Price Instruments on Land Use Policy’, Netherlands Journal of Agricultural Science, vol. 43. Kuyvenhoven, A., R. Ruben and G. Kruseman (1995) ‘Options for Sustainable Land Use and Policy Instruments to Reach Them’, in J. Bouma, A. Kuyvenhoven, B. A. M. Bouman, J. C. Luyten and H. G. Zandstra (eds), Eco-regional Approaches for Sustainable Land Use and Food Production, Dordrecht: Kluwer. Leonard, H. J. (1986) Recursos Naturales y Desarrollo Económico en América Central: un perfil ambiental, San José, Costa Rica: IIED (International Institute for Environment and Development). López-Perreira, M. A. and J. H. Sanders (1992) ‘Market Factors, Government Policies and Adoption of New Technology by Small Honduran Farmers: A Stochastic Programming Application’, Quarterly Journal of International Agriculture, vol. 31.

Ruerd Ruben 159 Lutz, E., S. Pagiola and C. Reiche (eds) (1994) Economic and Institutional Analysis of On-Farm Soil Conservation Projects in Central America and the Caribbean, Washington: World Bank Environment Paper No. 8. Maldidier, C., T. Antillón, N. Artola, A. Ruiz and K. Castillo (1997) Deforestación y Frontera Agrícola en Nicaragua, in Cuaderno No. 2 CRIES (Coordinadora Regional de Investigaciones Económicas y Sociales), Managua: CRIES. Mausolff, C. and S. Farber (1995) ‘An Economic Analysis of Ecological Agricultural Technologies among Peasant Farmers in Honduras’, Ecological Economics, vol. 12. Montes, S. (1989) ‘Impacto de la migración de salvadoreños a los Estados Unidos: el envío de remesas y consecuencias en la estructura familiar y el papel de la mujer’, Realidad Económico Social, vol. 1. Pearce, D. and D. Moran (1994) The Economic Value of Biodiversity, London: Earthscan/IUCN. Pomareda, C. (ed.) (1992) La agricultura en el desarrollo económico de Centroamérica en los noventa, Coronado, Costa Rica: IICA. Reardon, T. (1995) ‘Sustainability Issues for Agricultural Research Strategies in the Semi-Arid Tropics: Focus on the Sahel’, Agricultural Systems, vol. 48. Roebeling, P. C., R. Ruben, F. Saenz, E. Castro and G. Barrantes (1997) ‘Policy Measures for Sustainable Intensification in the Extensive Livestock Sector: A Farm Household Modelling Application in the Atlantic Zone of Costa Rica’, paper presented to the UNA/WAU Universidad Nacional/Wageningen Agricultural University, Seminar ‘Políticas para el Desarrollo Sostenible del Sector Agropecuario’, San José, Costa Rica, December. Ruben, R. and M. van den Berg (1997) ‘Farmers’ Selective Participation in Rural Factor Markets: An Analysis of Production and Expenditure Effects of Off-farm Employment in Rural Honduras’, paper presented to XII ASERCCA (Association for European Research on Central America and the Caribbean) Conference, Portsmouth UK, September. Ruben, R., G. Kruseman and H. Hengsdijk (1994) Farm Household Modeling for Estimating the Effectiveness of Price Instruments on Sustainable Land Use in the Atlantic Zone of Costa Rica, Wageningen: AB-DLO (Research Institute for AgroBiology-Dienst Landbouwkundig Orderzoek)/WAU DLV (Wageningen Agricultural University Programme Duurzaam Landgebruik en Voedselzekerheid) Report No. 4. Ruben, R., P. van den Berg, M. S. van Wijk and N. Heerink (1997) ‘Aspectos económicos de sistemas de alto y bajo uso de insumos en la agricultura de laderas’, in S. Scherr, B. Mirando and O. Neidecker-Gonzales (eds), Investigación sobre Políticas para el Desarrollo Sostenible en las laderas Mesoaméricanas, San Salvador: IICA/IFPRI/CIMMYT (International Food Policy Research Institute/Centro Internacional de Mejoramiento del Maíz y Trigo). Sain, G. and M. López-Perreira (1997) ‘Políticas que afectan la producción de maíz en Mesoamérica’, in S. Scherr, B. Mirando and O. Neidecker-Gonzales (eds), Investigación sobre Políticas para el Desarrollo Sostenible en las laderas Mesoaméricanas, San Salvador: IICA/IFPRI/CIMMYT. Segura, O. (ed.) (1992) Desarrollo Sostenible y Políticas Económicas en América Latina, San José, Costa Rica: DEI (Departamento Eucoménico de Investigaciones).

160 Economic Policy and the Environment Schipper, R. (1996) ‘Farming in a Fragile Future: Economics of Land Use with Applications in the Atlantic Zone of Costa Rica’, Wageningen, PhD thesis. Walker, I., J. Suazo, A. Thomas and H. Jean-Pois (1997) El impacto de las políticas de ajuste estructural sobre el medio ambiente en Honduras, in CRIES Cuaderno No. 2, Managua: CRIES. Wattel, C. J. and R. Ruben (1992) El Impacto del Ajuste Estructural sobre los Sistemas de Producción de Granos Básicos en Centro-América, San José, Costa Rica: IICA/CDR-ULA (Centro de Desarrollo Rural – Universided Libre de Amsterdam). Weller, J. (1996) ‘Efectos del Ajuste Estructural en el Empleo y los Ingresos Agropecuarios, con énfasis en las exportaciones no-tradicionales – los casos de Costa Rica y Honduras’, in H. Nuhn and A. Stamm (eds), Apertura Comercial en Centroamérica: nuevos retos para la agricultura, San José, Costa Rica: DEI. Wierema, H., C. Almekinders and R. Vermeer (1993) La producción campesina en Centroamérica: los sistemas locales de semilla, San José, Costa Rica: DEI.

8 Sustained Growth in Haiti: Pipe-Dream or Realistic Possibility?* Mats Lundahl

Introduction For several decades the Haitian economy has been one of the most fragile in the Caribbean region. Essentially, this is due to the insufficient natural resource base of the country, with the slowly but steadily increasing population pressing on a shrinking agricultural land area. Employment opportunities have been few outside of agriculture and the inevitable result has been that per capita income has declined over time for at least half a century, probably more. We will begin by sketching the fundamental mechanism behind the declining standard of living in rural areas. The second section explores the main present safety value: migration – out of the country and into urban areas. We then consider some agrarian reform efforts and nontraditional crops that could contribute to ameliorating the situation in the countryside. The chapter thereafter discusses the reasons behind the failure of import substitution in manufacturing, in contrast to the success of the export-oriented assembly industries until the devastating blow dealt by the international sanctions against Haiti in 1991–4, in the wake of the coup against President Jean-Bertrand Aristide. This is followed by a discussion of the industrial recovery that began after the end of the sanctions, the competitiveness in the short and medium run of the most important branches, as well as some ingredients in a possible industrial strategy. Following the discussion of manufacturing we will turn to a sector that is usually neglected in analyses of the Haitian economy – handicrafts – and examine its main present shortcomings and needs. Handicrafts are closely related to tourism – a sector that could be developed more than at present.

161

162 Sustained Growth in Haiti: Pipe-Dream or Possibility?

Most of the Haitian economy is informal, i.e. the economic actors are operating without much contact with the authorities. The special problems that this leads to are discussed next. Finally, two key inputs in the development process that have hitherto been lacking and which play an important role in most sectors, education and infrastructure, are considered. The concluding section provides an overall evaluation of the possibility of increased growth in Haiti in the short and medium term.

Population growth, erosion and poverty Between 65 and 70 per cent of the Haitian population of some 7.2 million people live in rural areas.1 All of these people, one way or another, are dependent on agriculture for their living, although, as a result of the increasing weakness of this sector, non-agricultural pursuits over time have come to match, and possibly even overshadow, agricultural production as a generator of income in rural households.2 The rate of population growth in Haiti, gross of emigration, is estimated to be around 2.5 per cent per annum.3 Unless the new entrants in the labour force emigrate or are accommodated in other sectors, the responsibility for employing them will fall on agriculture. Room must be made for them on the land, but, given the topography of Haiti, this is no trivial problem.4 Haiti is more mountainous in relation to its area than Switzerland. Between 20 and 30 per cent of the cultivated land is completely unsuited to agriculture and no less than 60 per cent has a slope exceeding 20 per cent.5 The interaction of population growth and soil erosion under these circumstances sparks a cumulative process that increases rural poverty every year.6 In Haiti two types of crops are cultivated: land-intensive and labourintensive. Traditionally, the most important among the former has been the main cash crop, coffee, while the latter category consists of food crops of different types, peas and beans, root crops, and maize. From the point of view of environmental conservation coffee has the great advantage of being a perennial plant, with roots that bind the soil on the mountainsides and with a canopy that protects the ground from the direct impact of the heavy tropical rains. The cultivation of food crops, in turn, has a completely different impact. These crops must be planted or sown at the beginning of the rainy seasons, one or more times during the year, and the land then has to be laid bare, with the result that the downpours carry the topsoil downhill into plains and rivers. Thus, whether a given piece of land carries land-intensive or labour-intensive crops is of fundamental importance in terms of erosion.

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Once the population grows in a given area, and given relative commodity prices (between the two types of crops), the crop mix will change. The man–land ratio in agriculture increases, and since the land area does not grow as well it becomes impossible to maintain the original composition of output.7 The Haitian peasants shift out of coffee production and plant more food crops instead. The uprooting of the coffee trees and the substitution of food crops increases the exposure of the soil to rain and wind and hence increases the possibility of erosion. Once soil is destroyed, the man–land ratio once more increases and the erosion process becomes cumulative. At that point no further population growth is necessary, for erosion will feed itself, increasing the man–land ratio in each consecutive round and also stimulating the progressive destruction of coffee trees. However, at the same time, the population continues to grow and add fuel to the fire. Altogether, the rate at which the soil is destroyed accelerates and with that the rate of reduction of per capita income in the Haitian countryside. Erosion is fuelled in a second way as well. The vast majority of the Haitians are completely dependent on charcoal and wood for energy, and this means that trees must be cut down in a country where extremely little forest remains.8 Charcoal and firewood have been without competitors in terms of price not only since the oil shocks in the 1970s but long before that. For practical purposes the price of the trees employed to make charcoal consists of the value the peasants put on the time it takes to cut and process them, as the trees mainly come from lands with unclear title and not from the peasants’ own farms. During the international sanctions that were applied to Haiti at various times between 1991 and 1994, in the aftermath of the military coup against President Jean-Bertrand Aristide, the demand for charcoal increased drastically. Oil, kerosene, and gasoline prices increased manifold. (Thus, in August 1994, oil was selling in the unofficial market for 12–18 times the official price.)9 This made charcoal production increase fivefold in some areas and the rate of deforestation increase by as much as 30 per cent in the humid and semi-humid mountain areas.10 The supply of charcoal increased as well. In certain places there were few other ways of making a living during the sanctions. Given the demand, however, it was easy to enter the charcoal market, as a producer and vendor – an effect that may remain, and even be reinforced, in the long run unless agriculture picks up again. Few forest resources are left in Haiti and if tree-felling continues then these resources will be lost within a few decades. The 1991–4 sanctions

164 Sustained Growth in Haiti: Pipe-Dream or Possibility?

also contributed to the acceleration of the erosion process via changes in the crop mix. Agricultural exports (not least of mangoes) declined both because markets were cut off and because some imported inputs were made unavailable.11 The erosion process described above operates at given commodity prices. If the relative price of export products increases then the possibility arises that the process could be counteracted, the peasants again planting coffee. Also, if the price of substitutes for charcoal could be made to decline in relative terms, other, less environmentally damaging, fuels would be used. Unfortunately, however, this scenario does not constitute a valid description of the Haitian reality. On the contrary, the tendency has been in the opposite direction during the past few decades, with the price of export goods declining in terms of foodstuffs and charcoal becoming ever more attractive in comparison to other combustibles.12 Thus, the erosion process has received an added impetus from relative price movements. ‘Hard’ empirical data are scarce in Haitian agriculture. Nevertheless, the cumulative process is clearly visible in the countryside. The peasants are uprooting their coffee trees and are planting food crops instead and have been doing so for many years. For whatever they are worth, agricultural production statistics indicate a secular decline in the output value per capita for at least four decades. In the mid-1980s, the average had fallen by 20 per cent in comparison with the mid1950s figure, and thereafter the downward trend continued, with as much as a 7 per cent decrease on average during the 1991–4 sanctions episode.13 Altogether, there is little doubt that the Haitian peasant is getting poorer and poorer. It seems impossible to reverse the erosion process as long as the cultivation of the steep hillsides continues, not only because the process accelerates over time but also because it involves strong externalities. Erosion control in Haiti can be described in terms of the Prisoner’s Dilemma. All the peasants in a neighborhood could in principle be better off if they all decided to combat erosion, but the incentives facing them are conducive to non-cooperative behaviour. The runoff on the hillsides affects everybody’s plots, and if those whose lands are higher up do not terrace them, the plots below will be hurt even if measures to control erosion are carried out by their owners. Isolated individual efforts are worthless. There is also the time factor to be reckoned with. The benefits from erosion control accrue only in the future while the costs arise in the present. Given the already low incomes, the peasant’s main worry is to eke out a living today, in spite

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of the fact that this may mean that tomorrow he will be even worse off. Reducing or reversing tree-felling is difficult as well, as property rights in areas where trees are cut down are usually not well defined. This makes supervision and design of credible sanctions exceedingly difficult. The land is viewed as a common resource and the trees are treated as if they were free goods, with continued over-exploitation as the inevitable result. Traditional agriculture does not have a bright future in Haiti. The existing trends are alarming. In 1950, the area available for cultivation amounted to 0.38 hectares per capita of the population. At present the figure is likely to be 0.16 hectares, with a population of 7.5 million.14 As of today, Haiti cannot feed its population adequately using what is being produced domestically. On average, over 40 per cent of what the average Haitian eats comes from abroad, 34 per cent as commercial food imports and the rest (7 per cent) as food aid.15 This mining of the soil cannot continue much longer if a catastrophe is to be avoided.

Migration The secular decline of rural per capita income has created a push out of the countryside, into the cities or to other countries. Emigration (legally or illegally) has brought net population growth down to around 2 per cent per annum,16 but, unless the present trends in fertility – five children per woman – are changed, this safety-valve will be hard pressed to handle larger numbers of people even in the short run. Population projections are not encouraging: an estimated 20 million Haitians in 2040 – almost three times as many as today.17 Migrants to urban areas within Haiti are facing a difficult situation. During the last two or three decades, Port-au-Prince, the main recipient, has experienced increasing problems when it comes to handling the task. The city had less than half a million inhabitants at the beginning of the 1970s.18 The figure has since increased to 1.4 million, and out of Haiti’s 7.2 million inhabitants, altogether 2.3 million live in urban districts. In 2025, if present fertility and migration trends continue, the population of the capital will be some 4 million, with another 2 million living in other urban areas.19 The consequences in terms of housing, sanitation, congestion, safety, and crime are easy to imagine, with a socially very unstable Port-au-Prince as a little Calcutta in the Caribbean. Emigration has brought Haitians to the United States, Canada, France, the Dominican Republic, and a number of Caribbean islands,

166 Sustained Growth in Haiti: Pipe-Dream or Possibility?

notably the Bahamas, and the Turks and Caicos. The United States, Canada, and France house over a million and the Dominican Republic about half as many.20 Even though the flow of boat people to Florida has dropped drastically, after the end of the sanctions, from almost 25,000 in 1994 to a mere 700 two years later,21 this exodus will continue in the years to come. Possibly, emigration to the United States will pick up again, as indicated in a recent report from a humanitarian foundation: The slow pace of recovery of the Haitian economy and political uncertainty has contributed to a continued sense of hopelessness within the population. Such desperation fuels a desire to leave, and a trickle of Haitians continues to leave Haiti in small boats, often to be intercepted and returned by U.S. Coast Guard vessels. The potential for a migration or refugee emergency thus remains high and could be unleashed quickly by a political or economic crisis.22 The conclusion is obvious. Unless a viable alternative can be found inside Haiti to traditional, unsustainable agriculture, emigration will continue, probably at an accelerated pace. What, then are the alternatives? Let us begin with agriculture itself. What possibilities for change exist in the sector where the majority of the Haitians are concentrated?

Agricultural reform? The Haitian government is well aware of the need to do something that improves living conditions in the countryside. To this end, an agricultural policy has been devised that is based on four different priorities: development of large irrigation systems in the plains and rehabilitation of water retention and distribution systems in the mountains to improve infrastructure, increased security of land tenure for the peasants, improved access to land, extension and financial services in combination with marketing of Haitian agricultural goods abroad and investment in agro-industries, and, finally, agricultural research.23 What good this will do is, however, highly uncertain. Most fundamental is that the erosion and population problem is not put at the centre of attention. A related problem is that the budget resources of the Haitian government are very limited. The risk is high that resources will be spread across too many areas. The government may or may not have realized this. Hitherto actual policy has been strongly concentrated on changes in the system of

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land tenure. This began as a response to agrarian unrest in the Artibonite Valley. Tenure had been made insecure by an invasion of landless sharecroppers and violent conflicts had erupted over land. In addition there were disputes between local communities.24 Faced with this, the government decided to simply take over the disputed land and if necessary redistribute it. An Instituto Nacional para la Réforme Agraria (INRA) was created in April 1995,25 and on the Fête de l’Agriculture, 1 May, the following year, usufruct rights to 5,000 hectares of state land and disputed areas were allocated,26 followed by another 6,000 hectares a year later. Subsidized credit and reparation of deficient irrigation systems completed the picture (Tè ak dlo ak kredi ak ankadreman teknik fè refòm agrè).27 These measures have been well received in Haiti. All peasants are for agrarian reform, and the government knows that. The process is scheduled to continue in the future, presumably with the Plantation Dauphin in the north, once the world’s largest sisal plantation, and a new land law is virtually ready.28 There is, however, another side to the land reform efforts as well. The concentration on redistribution seems to have blocked all other policy measures in the agricultural sector, and land reform as such does nothing to stop erosion from spreading because it fails to tackle both the crop mix problem and the rehabilitation issue. Instead, the concentration is on a short-run matter: increasing agricultural production, with the obvious risk of over-exploitation. The peasants receive only usufruct rights, not title, which means that the basic uncertainty with respect to ownership is not removed. In this situation the danger that they will attempt to squeeze as much as possible out of the soil in as short a period as possible is high. Tenure may even have become more precarious than before on lands not involved in the redistribution, because title disputes can easily provoke government intervention and decisions that lead to uncertain results. A recent major study of Haiti’s agriculture, carried out by the FAO, stresses the need for an integrated strategy for agriculture. Such a strategy would have to be broad in scope and pay attention both to the prevention of erosion by increasing the permanent cover of the soil, by rehabilitating irrigation systems, and by providing inputs.29 This is in principle a correct approach, but where do you begin? The problem of the agricultural sector in Haiti is that it is in a state of cumulative decline as a result of the interaction of population growth and soil destruction. Virtually all the inputs that could be conducive to change are lacking – credit, education, technological change, etc. – and it is difficult to know where to begin and how to design a strategy that

168 Sustained Growth in Haiti: Pipe-Dream or Possibility?

maximizes the impact. Not least, the crop mix aspect must be dealt with, since it is at the very heart of the decline. What the sector needs is crops that are at the same time labour-intensive and environmentally sustainable. The search for such crops has barely begun in Haiti, and this is hardly the place to come up with detailed suggestions on the individual crop level. A few examples will suffice. The Inter-American Institute for Agricultural Cooperation (IICA) has initiated a coffee production scheme with the double aim of creating a better image of Haitian coffee in the international market, based on higher quality, and bypassing the spekilatè and the exporters (the traditional intermediaries) in the marketing chain.30 The scheme covers around 20,000 growers in the Jacmel and Gros Morne areas. Organically cultivated coffee is grown alongside other peasant crops instead of competing with them. This on the one hand contributes to the ecological stabilization of the hillsides, and on the other hand gives the cultivators an opportunity to avoid excessive concentration in one crop that does not provide any cash income during the dormant season. The organic coffee is bought at whatever market price is prevailing at harvest time. It is thereafter prepared according to the labour-intensive ‘wet’ method to obtain a quality that is higher than that of traditional coffee, produced with the aid of the ‘dry’ method. The resulting product is exported directly to the United States, where it is sold in the gourmet segment of the coffee market, on a five-year contract that gives the growers a price that is higher than the average obtained in Haiti. The difference between this price and the one paid at harvest time is distributed to the participants in the scheme. Non-traditional coffee is an example of a crop that faces an increasing demand. The market for high-quality gourmet coffee is expanding rapidly in the United States and this appears to be reflected in the incomes of those participating in it. (The traditional intermediaries have been forced to increase the prices they offer to the producers to be able to compete.) Still, what will happen to the scheme is highly uncertain. Finance is not secured for more than one year, and this may prevent the planned expansion into the northern part of Haiti. In addition, a price war may be lurking around the corner, should the scheme be so successful that it threatens the interests of the traditional intermediaries; what the outcome of such a war may be is difficult to know. What the coffee example demonstrates is that it is possible to find crops whose value per unit of weight or volume is high, and which can

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be marketed successfully abroad in market segments where the income elasticity of demand is high and which increase employment and incomes in the peasant economy. Finding other crops with similar characteristics will require a number of specialized studies of market conditions, labour requirements, natural growing conditions, environmental effects, and compatibility with traditional peasant farming. Candidates may not be lacking, however. Haiti has in the recent past been one of the largest exporters of mangoes in the world, before the sanctions began to reduce the mango stands. These exports can presumably be revived in the somewhat longer run, since mangoes have the additional advantage of constituting an essential part of the Haitian diet. They could also be processed by agro-businesses. Horticultural products are another case in point, being successful already in some humid mountain areas. Flowers are another possibility and most tropical spices should grow well in Haiti. The neighboring Dominican Republic provides an encouraging example. In the Cordillera Central an experimental pepper-growing project is on stream and seems to work well, not least from the employment point of view. It is very labour-intensive and it provides opportunities both for men and women, without demanding drastic changes in traditional work roles.31 Non-traditional crops hence seem indispensable if Haitian agriculture is to survive in the long run, but the crops selected must provide proper incentives to the peasants. Other changes may be required as well. Eventually the role of peasant agriculture in general may have to diminish. At least since the American occupation of Haiti (1915–34), and the introduction of foreign-owned plantations, the theme of largescale agriculture has been virtually taboo in the country. Still, larger units may have a role to play. At present the average size of peasant holdings (perhaps 0.5 hectares) has shrunk to the point where these no longer can feed a normal-size family. They are geographically divided into many plots, and, because all children have inheritance rights to equal-sized plots of equal quality, this pulverization will continue in the future. It will become increasingly difficult to wring an adequate income out of this structure. In Haiti, the largest landowner is the state, and on land where state ownership is established without doubt the possibility exists to invite modern foreign, export-oriented companies that employ superior techniques and require labour on a reasonable scale to produce such crops as pineapple, which is successfully produced in the Dominican Republic.32

170 Sustained Growth in Haiti: Pipe-Dream or Possibility?

Manufacturing: import substitution What do the Haitian cities have to offer those who have to leave the countryside? Unfortunately not very much. The industrial sector has never been very big in Haiti and during the 1991–4 sanctions the most viable part suffered heavy setbacks and the effects on employment are still strongly felt. Manufacturing consists of two separate segments, without much contact between them. The first to be established was the importcompeting one. This was able to work only thanks to high tariff protection in combination with different types of monopoly privileges from the end of the 1940s until the fall of Jean-Claude Duvalier in 1986.33 It is difficult to qualify this whole venture as anything but disastrous. Normal principles of competition were set completely aside. Instead, the game consisted in the establishment of contacts in high places by ‘entrepreneurs’ cornering the markets for imports and production of goods with a strong domestic demand. Naturally, the ones paying for this were the consumers. At the end of the 1970s and the beginning of the 1980s the situation became even worse as a series of governmentowned companies were established in sugar, soybean oil, cement, and wheat flour. None of these was ever economically viable. Their only raison d’être was that they served as a mechanism of pumping money into the pockets of the Duvalier family. The transitional government that took over after the fall of Duvalier in February 1986 proceeded to reduce the level of protection. One of the two sugar factories was closed down and the monopoly privileges of the cement and wheat flour companies were abolished. This forced a drastic adjustment on the import-competing sector and in the 1990s the combination of political unrest and international sanctions forced most of the firms remaining in the sector to close down.34 What remains of the state-owned ventures is today on the list of privatization objects. The import-substitution episode is a sad story, and the main lesson to be learnt is that high protection levels simply create rents, and these rents will inevitably be sought by politically well connected individuals who will not run companies efficiently. The goods that are eventually produced tend to come from sectors where Haiti has a comparative disadvantage. Whatever employment is generated in this highly artificial fashion is created only at a very high real cost to the economy. No linkage effects arise, since the absence of competitive pressure limits output and growth, and with that also the demand for inputs from

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other sectors. Import substitution thus turned out to be a complete dead-end in virtually all respects: its net contribution to the economy was negative.

Manufacturing: the assembly industries The second manufacturing sub-sector is the export assembly industries. These had to compete in international markets and hence displayed a much higher degree of vitality and dynamism in the 1970s and 1980s than did the import-competing firms. Their share of exports increased quickly, from less than 5 per cent in the mid-1960s, to over two-thirds before the mid-1980s. Employment followed suit and expanded to the point where in 1990 more than 250 firms in the sector hired some 46,000 people.35 Each of these employees, in turn, was supporting three or four dependants on average.36 Thus, between 185,000 and 230,000 Haitians – or close to 20 per cent of the population living in Port-au-Prince – relied on the assembly industries for their existence. The export sector had to overcome a number of obstacles in order to grow. In the first place, protecting the import-competing firms made for an anti-export bias by increasing the domestic price of their output in terms of export goods. Second, they had to struggle with the price, quality, and delivery of infrastructural services. Third, the lack of both general education and specific training among the workers posed problems. Finally, some of the main inputs of the public sector consisted of red tape and arbitrary interventions. On the other hand, the assembly plants benefited from the low minimum wage level (which was not always respected), the lack of trade unions, the exemption of import duties on inputs and export duties on finished products and of income and licence taxes, and finally, the favourable tariff treatment in the main market: the United States.37 Unfortunately, the ascending curve of the assembly sector was abruptly broken when the coup against President Aristide took place in 1991. The resulting international sanctions to some extent exempted the export industries, but not enough to cushion them from being severely hit. Of the 252 firms operating in 1990 only 44 were left in early 1995, and employment was reduced from 46,000 to less than 5,000 as the companies closed down.38 The sanctions led to market disruption, steeply rising energy costs, unavailability of spare parts, scarcity of inputs in general, and loosening of work discipline during the political turmoil that ensued. As is well known, assembly industries

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are inherently footloose. Most firms hence closed or left the country. The dynamism created in the economy was gone.

Industrial recovery39 What will happen to the industrial sector in the near future is unclear. The effects of the sanctions can still be felt. Employment has picked up little by little as companies have reopened: 13,000 in mid-1995, 18,500, in 101 firms, a year later, and, as of May 1997, somewhere between 20,000 and 25,000.40 The average per firm has been brought to the same level as in 1990: 183 employees; but the total has reached only half that year’s figure. Both domestic and foreign investors view Haiti as a risky venture, and this puts a brake on the speed of the recovery process. The foreign customers, in turn, were forced to shift to other supply sources during the sanctions. (Those who remain are essentially the same as before the sanctions.) The recovery so far has been confined almost exclusively to domestic producers, and only companies that were active before the coup have reopened their doors. Little else has changed. The comparative advantage – low wages – remains the same in Haitian manufacturing. In the assembly sector unionization is virtually non-existent and the fact that the minimum wage increased from 15 gourdes per day to 36 in May 1995 seems to have had few impacts. (Before that the figure had not changed since October 1984.) In real terms the minimum wage level is lower than a decade ago and the wages paid in the assembly sector are usually above this minimum.41 At the end of 1995 a study appeared which compared production conditions in Haiti with conditions in Mexico, Jamaica, the Dominican Republic, El Salvador, Cuba, and China.42 This study looked into, among other sectors, assembly work (sporting goods, toys, clothing, and electronics), processing (agro-industries and industrial artisanry) and constructed weighted indices of comparative advantage based on 26 variables connected with the legal and administrative situation, economic policy, manpower, including wages, services, and industrial zones. The results were discouraging. Low wages, a liberal policy vis-à-vis foreign investors and a geographic location close to the United States could not compensate for shortcomings in most other respects. It was only with respect to Cuba that Haiti possessed a comparative advantage in the short run. In clothing, toys, and sporting goods, the indices for Haiti were approximately at the same level as those for the Dominican Republic. The other countries outdid Haiti in all sectors.

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Macroeconomic developments since the return of Aristide, not least the results of the Programme d’Urgence et de Reconstruction Économique, are in the main conceived of as favourable in business circles, but another impression prevailing there is that the state so far has failed to guarantee law and order, not least physical security. It is difficult to find industrial buildings in safe areas. Second on the list of business complaints is what somewhat euphemistically is called the ‘difficult and unpredictable social environment’, i.e. the expression in the streets of the frustration of broad population segments when pondering what the future may bear, as a result of, among other things, lack of communication from the government about the rationale behind economic reforms. This factor carried a higher weight than such economic factors as the lack of industrial infrastructure, lack of support from the government bureaucracy (expressed, e.g. in recurrent delays in formality matters), and high nominal interest rates on industrial loans (on average 24 per cent per annum).43 Thus, the immediate situation looks bad. Confidence is low in business circles and so is industrial productivity. What may happen in the somewhat longer run is difficult to know. The 1995 study gives no reasons for optimism on this point. The competitiveness of the assembly factories may improve marginally in relation to the competitors in the Caribbean and Central America, but only provided that the social and economic situation of Haiti stabilizes and the reform ambitions are not shelved. However, their handicap in relation to Mexico and China will still persist in virtually all branches and neither agro-industries nor industrial artisanry will be competitive. This picture could in most cases be changed if the pace of administrative reform is accelerated, finance is improved, Haiti is integrated into the North American Free Trade Association (NAFTA), and the gaps to the competitors with respect to human resources, services, and infrastructure are closed, but these are options that are hardly available in the short run.44 The long run presents other difficult problems. Today, operations in assembly manufacturing build only on low wages. An interesting question is whether it will in the future be possible to ‘trade up’ and produce goods with somewhat higher technological contents conducive to higher, and preferably increasing, wage incomes and linkages to other sectors in the Haitian economy. This, unfortunately, does not appear to be the case. At least three factors tend to make it difficult to move away from the low-wage end unless we are talking about the very long run.45 In the first place, the inputs required by technologically more sophisticated industries tend to be very specialized. They are often

174 Sustained Growth in Haiti: Pipe-Dream or Possibility?

non-traded intermediates that must be produced more or less on the spot by local firms in close collaboration with their customers precisely because the designs involved need to be tailor-made. This, in turn, tends to create a ‘trap’ that it is very difficult to break out of. Causality runs in both directions. On the one hand, there must be enough demand for the manufacturers of intermediates to be willing to make the effort, since the specialized skills required translate into high fixed costs. On the other hand, if these skills do not exist no specialized intermediates will be produced and the final goods producers dependent on them will never open their doors. The crucial factor when it comes to breaking this vicious circle is education. The general education record of Haiti is, however, the worst in the Western Hemisphere,46 and as far as specialized technicians and other skilled employees are concerned the situation is even worse. This can be remedied only in the long run by a gradual, concerted effort of expanding vocational and technical training at the secondary and tertiary levels. Skill creation may not be enough. There is also a structural characteristic that is difficult to overcome. In the present international division of labour Haiti is a net importer of non-traditional manufactures. This means that any effort to develop differentiated industrial goods will have to face the competition of low-priced imports when developing the R&D activities needed for trading up. Hence, the latter may never become profitable and Haiti will in that case be locked into the lower end of the industrial ladder, producing just low-wage goods with the aid of simple techniques. Having said all this, despite the devastating effects of the sanctions the assembly industries continue to be the most dynamic segment of the Haitian economy. The sector has recovered relatively well, given the difficult external circumstances. This, in turn, must be compared with the fact that traditional agriculture is not a viable option and that, barring large-scale migration, changing the agricultural sector will be exceedingly difficult. The search for non-traditional crops must be accompanied by measures that create employment outside agriculture and hence ease the pressure on the ecologically vulnerable hillsides. In the light of history, escape from poverty has taken the road of industrialization in all the nations that count as developed today. Haiti must do the same. In this context, one strategy that has not been employed so far in Haiti is that of creating industrial free zones or export processing zones,47 whereas in the neighbouring Dominican Republic no less than some 175,000 industrial workers are employed in 33 free zones, where

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they produce mainly garments. Other competitors in the Caribbean have also expanded employment in this way: Guatemala, 100,000, and Honduras, 45,000. The sitting Commission Présidentielle pour la Croissance et la Modernisation Économique commissioned a study on the effects of free zones in Haiti.48 This study elaborated a basic framework according to which the zones should be private but placed under supervision of the Direction Générale des Douanes. They should be administered by an organization with a majority representation of private business associations. In practice, most of the conditions outlined in the study are already fulfilled in Haiti. No export duties exist, tax and import duty exemption is the rule for export-oriented industries, and capital moves freely out of Haiti. Rather, the main benefits from locating in a free zone stem from access to buildings, physical security, and general infrastructure. It is much easier to control a geographically delimited free zone than a number of factories spread out over a wide territory. The zones could also be given priority when it comes to such items as power, water, telephone lines, etc., and one should expect that the geographical concentration of companies should facilitate transportation considerably. The infrastructure problem requires further discussion and we will hence come back to it below. Before that, however, we should take a look at the handicraft and tourist sectors, for the simple reason that the development of these activities to a large extent faces the same difficulties as the manufacturing sector.

Handicrafts A sector that is usually left out of the analysis of the Haitian economy is handicrafts, rural as well as urban.49 Haiti has a long handicraft tradition that goes back at least to the 1920s, and the starting point of the sector’s modern history could be traced to the early 1970s. Tourism began to recover after the dark Papa Doc years and craft exports were facing a growing international market after years of stagnation. Increasing quantities of metal and wood products, baskets, tapestries, macramé, crochet, and other weaving products were sent abroad. However, these exports soon ran into problems. In the early 1980s, the market began to be saturated with Haitian goods during a period when price competition from producers in other countries started to be intense. Since Haitian producers by and large failed to adapt to changing

176 Sustained Growth in Haiti: Pipe-Dream or Possibility?

tastes as far as patterns, design, and quality were concerned, Haitian goods were falling behind in the Caribbean tourist market. The demise of Jean-Claude Duvalier and the return of Haitians from exile abroad produced new incentives for handicraft production: inspiration from abroad in combination with a renewed interest in popular Haitian culture and national themes. The demand for Haitian handicrafts increased both abroad (among the Haitians in the diaspora) and at home. The sector was seeing a bit of a ‘renaissance’, further reinforced by the triumph of the democratic forces at the end of 1990. The renaissance did not last long, however. Handicrafts were rammed as hard by the sanctions as any other sector in the Haitian economy. Between 1985 and 1990 Haitian artisans, located mainly in rural areas, had contributed some 10–15 million US dollars’ worth of exports each year. After the 1991 coup they were forced to cease their production and many, needing the cash, even sold their tools. Handicraft exports dropped from about 9 million dollars in 1990 to a mere 1.4 million in 1994, and the share of handicrafts in total exports dropped from 12.6 to 6.1 per cent. The cost of raw materials in many instances skyrocketed, with increases ranging from 100 to 400 per cent. At times, inputs were simply not available. At the same time, the money inflow from relatives abroad, which had been used to finance activities, was cut off. The handicraft sector was decapitalized, and as early as 1992 many craftsmen shifted to commerce and similar activities instead.50 To what extent the handicraft sector may have recovered after the end of the sanctions is impossible to say, notably for rural areas, where definition and classification of activities is notoriously difficult. Those active are concentrated in basketry and fibre craft, wood sculpture and other woodwork, as well as embroidery and needlework. Of these, needlework and woodwork have faced problems as a result of increased international competition. Overall, traditional crafts are having problems since they have to compete with industrial products both for markets and for qualified designers. Still, only a minority of the artisan population of Haiti works for industrial firms.51 The tourist market, in Haiti and in the rest of the Caribbean, not least the Dominican Republic, is the main market for the handicraft sector. However, industrial craft products with a pronounced ‘Haitian’ touch have found a niche in the United States, and the more individualized, high-quality items have no problems selling in the international market, although quantities are small.52

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If these markets are to be developed, the handicraft sector must overcome a number of obstacles. In 1996, a survey of handicraft production in Haiti identified the following major constraints: education and training, design, production, funding, marketing, organization of the sector, government policy, and legislation. The rapidly changing international markets require training for adaptation and diversification. The buildings and tools employed are often not designed with the goods they help to produce in mind. It is difficult to find raw materials, the finish often leaves things to be desired, and the producers are unfamiliar with pricing practices. Designs are frequently out of touch with tastes overseas and changing them requires considerable time. It is difficult to find new marketing outlets, not least since producers often have only dim ideas about what the market looks like. In this context it should be noted that the Haitian state does not provide much support, while the governments of the competitor countries tend to be extremely active. The general lack of adequate transportation in Haiti in turn increases the price that the final consumer has to pay. Unless they are prepared to pay high interest rates, small producers have problems finding adequate finance. Cooperation and common representation of interests is lacking. Finally, the government has failed to promote handicrafts through legislation, implementation of already existing laws, and development of special incentive schemes. Thus, handicrafts in Haiti have to cope with a formidable array of problems. In addition, the sector stands out as extremely heterogeneous, with one end in almost industrial production and the other in primitive products made by single producers. This must be kept in mind when support and solutions are to be devised. The main difference here, between industrial production and traditional crafts, is based on organization and division of labour. The single artisan has to perform all the operations alone. The industrial enterprise, on the other hand, makes systematic use of the division of labour and thereby achieves a productivity level which is impossible for the individual to reach by himself. This observation bears directly on the problems of handicrafts. On the one hand it is desirable that this sector strengthens its relations with manufacturing, so that as many artisans as possible can be transferred into higher-productivity pursuits within the latter sector. This is, however, not enough, since the handicraft sector also contains a group of artisans that are difficult to incorporate into industrial production. For these, support in the form of credit and marketing and, not least, technical assistance in developing designs and avoiding repetitive patterns that rapidly saturate the market is desirable.

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Tourism One of the most important markets for handicrafts is provided by tourism. In addition, tourism is a labour-intensive sector that under favourable circumstances can make a contribution to employment. Haiti has a reliable climate, with the mean temperature varying by a mere five degrees Celsius between the coolest and hottest months of the year. The rainy seasons do not coincide with the tourist peak seasons at the end of the year and during the summer. In addition, the colourful culture and history of the country give Haiti a comparative advantage vis-à-vis its competitors in the Caribbean region. Still, the fate of tourism in Haiti has varied considerably over the years. The history began with the Bicentennial Exposition in Port-auPrince in 1949, and the number of visitors to the country increased steadily from 5,000 in 1945 to almost 60,000 in 1960.53 The following years, however, were the darkest ones of the Papa Doc regime (and in the modern history of the country, for that matter), and numbers dropped to 19,000 in 1964, with visitors staying no more than three days on average. The death of Duvalier in 1971 and the improved image abroad during the first years of Jean-Claude’s presidency made tourists return. The total number of visitors reached a peak of 339,000 in 1979. However, all of these were not tourists. The majority was Haitian emigrants visiting their country of origin, people in the aid community, and foreign businessmen. At this time, some 2,500 hotel rooms were available in the country. At the beginning of the 1980s, tourism contracted again. The world economy entered a recession, the Baby Doc government was increasingly accused of human rights violations, and Haiti appeared on the list of ‘H’s’ suspected to be behind the spread of AIDS in the United States.54 This negative news was followed by political unrest in Haiti. Total receipts from tourism in 1984 amounted to no more than they did in 1972. It was hoped that the fall of Baby Doc in 1986 would change the situation, but as the political situation deteriorated, the prospective tourists preferred not to come, especially not since the Minister of Public Health stated that 10 per cent of all Haitians might be infected with AIDS. During the next few years, little happened that could change the situation. The 1987 elections were interrupted and when a president was finally elected, the following year, it was under highly dubious circumstances. The new president was rapidly ousted by the military, and when Jean-Bertrand Aristide, who was elected by a landslide

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majority of two-thirds in 1990, was thrown out of the country the following year, another low-water-mark was reached. The international sanctions practically killed the industry.55 The only visitors arriving were Haitians from the diaspora visiting their relatives, and during the first quarter of 1995 it was even reported that as much as 70 per cent of the hotel beds in Port-au-Prince were occupied by Haitians coming from abroad, paying in US dollars.56 (It should then be noted that most of the visitors were staying with their families.) Tourism has never been quite a success in Haiti, even when the political circumstances have been favourable. The country’s share of the Antilles market never exceeded a couple of percent.57 The notorious lack of infrastructure has put a brake on mass tourism even during periods when there has been no violence or political turbulence. Outside the capital there are few hotel beds and the communications between the provincial cities and Port-au-Prince have most of the time been very poor. This makes it difficult to reach such spots as, for example, Jacmel and Cayes on the south coast and Cap Haïtien in the north. Even during the best years, at the end of the 1970s, this was true and thereafter the transportation network has deteriorated gradually. Four-wheel-drive vehicles are finding a growing market in Haiti. There are no railroads and most tourists stay clear of the overloaded and overcrowded trucks that provide the only collective transport between major cities. Hence, in practice, whoever visits Haiti for tourism, is locked into the capital, where no beaches exist, unless he or she is willing to rough it. These are issues that must receive priority if tourism is to receive a boost in the future. Whatever investment in hotels, restaurants, etc., is needed will have to come from private, domestic or foreign, sources, but it will not materialize unless Haiti’s international image improves considerably. The feeling that the country is not a secure and stable place to go to must be made to disappear. No other sector in the economy has suffered as much as tourism from the overwhelmingly negative publicity that Haiti has received in the past. Security and stability are only necessary, and not sufficient, conditions for an expansion, however. A decent infrastructure is needed as well. Power-cuts at odd hours, a chaotic traffic situation in the capital, non-availability of beaches close to Port-au-Prince, and no transportation to the areas where beaches are, in fact, available, are all things that have little appeal for the average tourist. The Cap-Haïtien area, for example, has more to offer than the capital, but ever since the American occupation, 1915–34, resources have been heavily concentrated in Port-au-Prince and its surroundings, and this pattern was strongly reinforced during

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the presidencies of the two Duvaliers. Thus, the tourism issue is also deeply entangled in the wider regional development question – an issue that has received very little attention in Haiti. The Préval administration professed an interest in tourism. Haiti should be marketed as a ‘different’ country, with a strong and highly specific cultural and historical heritage, and the state must cooperate actively with the private sector and with other countries in the Caribbean.58 Inspiration should not be lacking. The Dominican Republic has seen a tremendous boom in tourism during the past decade, and parts of Haiti could presumably make use of this fact, notably the border area in the north, where Cap Haïtien and Henry Christophe’s magnificent Citadelle la Ferrière are located.

Problems with the informal economy Most of the Haitian economy presents a special problem in that it is informal. The state has difficulties reaching actors that pay no attention to its laws and regulations. This is the case with virtually the entire peasant sector, many small manufacturers, most artisans and others active in the handicraft sector, many traders, and virtually all personal services. Some 650,000–750,000 people are estimated to be working informally in urban areas.59 Microenterprises dominate the informal sector. Often, they do not consist of more than a single individual. Many are women. Owners are individuals or families. The business volume tends to be very small and no taxes are being paid.60 Local raw materials are employed in labour-intensive, mostly technologically rudimentary, operations. Those who work in the sector have little formal education, frequently none at all. Entry is completely free in the informal economy. Markets are very competitive. Incomes and living standards are low, as a result of low labour productivity, which, in turn, makes savings and capital formation difficult. Informal entrepreneurs have to cope with special problems. They lack access to formal credit, and in cases where outside finance is required this comes as short-term loans only, from informal sources charging high real interest rates as a result of lack of collateral and lack of supervision of how loans are used. The informal entrepreneurs have very limited access to public infrastructure facilities. Power, water, and garbage collection have to be obtained in informal ways. Often, human power has to be resorted to and the capital equipment is limited to simple hand tools. The buildings used (if any) may not be adequate for

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the type of operations performed. Industrial space is both scarce and expensive in Haiti, so location, as well, is a problem. Very few projects have in the past dealt with the problems of the informal sector. This field has been more or less left by the Haitian state to non-governmental organizations that have worked mainly on living and working conditions and provided some credit, mainly for commerce. The market forces reign supreme and entrepreneurs and workers have to adjust more or less instantaneously when conditions change, which may be overnight. The diversity of the sector and the large numbers of people involved calls for an approach which is diversified and decentralized as well, as exemplified by the discussion of handicrafts above. It is doubtful whether formalization would do any good. As of today, efforts are limited and concentrated to registration and formalization of the titles of the property on which the microenterprises are located.61 Formalization would in principle make it easier for enterprises to have access to public services, notably in infrastructure. Still, it is highly doubtful whether this is a viable proposal. As we will soon come back to, the present provision of such services leaves a lot to be desired, and one important implication of formalization would be the need to pay taxes. Presumably, in the near future the informal sector will remain beyond the reach of government efforts, and whatever satisfaction of the sector’s demand for education and training, credit, and infrastructure that is possible will have to continue to take place through non-governmental efforts.

Key inputs: education Much of the foregoing discussion has revolved around two common themes: the need for education and training, and the need for a vastly improved physical infrastructure. These are necessary, but not sufficient, inputs if Haiti is ever to break the downward cumulative process that the country has been caught in for several decades. Beginning with education, the history of Haiti in this respect is discouraging.62 When the American occupation of Haiti began, in 1915, the situation, especially in rural areas, was dismal. The peasants were more or less completely illiterate. The Americans made an effort to change the educational system, away from the emphasis on literature and humanistic subjects that characterized the French tradition, toward a system putting more weight on manual and vocational

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practical training. The effort failed, however, and once the Americans left, the French-derived schools reigned supreme again. Over the next few decades, few changes were experienced. When the 1950 census was taken, the illiteracy rate for the entire country was found to be almost 90 per cent. Twenty-one years later, the figure still remained high – close to 80 per cent (90 per cent in rural districts).63 An impossible system had been created. It used a foreign language – French – as the medium of instruction, and very few texts were available in Creole. To this was added the strong emphasis on examination at all levels of the system. The result was catastrophic. The school system did not serve as a vehicle for the accumulation of human capital, but as a filtering device – and a negative one at that. Social mobility was minimized and allowed those on the top rungs of the societal ladder to continue to control those below. The vast majority of Haitians failed to complete even the primary cycle.64 In the mid-1990s, some things changed, but not very many. Creole has taken the place of French – successfully, it seems, since the official illiteracy figure has been reduced to 42 per cent for the country as a whole, a figure that may, however, be an exaggeration since enrolment leaves a lot to be desired. As many as 90 per cent of all the children of school age enter school, but only 29 per cent of the beginners in first grade go on to the secondary level, and a mere 6 per cent finish that level. Only 4 per cent continue on the tertiary level. Grades are frequently repeated.65 The quality of the education received is usually bad. Teachers are often unqualified, few, if any, textbooks are available and the buildings used as schools are old and decrepit. Many teachers are forced to hold other jobs on the side since the salaries they receive are so low that they do not allow a decent living. Because of this, recruitment is difficult, extremely so in rural areas. Most of the schools are private and only a minority are enrolled in the state-run schools. The majority go to schools run by NGOs, churches, private persons, etc.: 66 per cent in the primary cycle, 81 per cent at the secondary level and 50 per cent at the tertiary.66 The quality range is very wide, from very good to catastrophic. On the national level, no massive alphabetization program exists. There remains no doubt that the school system in Haiti needs to be both expanded quantitatively and improved qualitatively. If we are to believe official statistics there is a considerable willingness to pay for education among families who have children of school age. Between 11 and 13 per cent of the family budget is spent on schooling by those

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who send their children to private schools, a figure that ranks very high when compared with other countries at a similar income level.67 All families cannot afford to pay, however. The state, one way or another, must assume the main responsibility for education. Educational reform is now being carried out in Haiti, and joint ventures between the state and private schools have been suggested as a way of increasing the cost effectiveness of investment in education. The state would then not run the schools directly but rather subsidize operations and control curricula and quality. The budget of the Haitian government is extremely limited. In this situation, the importance of efficiency looms large and the public school tradition in Haiti is not a successful one. With this in mind, there are good reasons to believe that the most efficient way of increasing quality and quantity in the educational sector goes via a mixed system. One of the most crucial areas in the school system is that of technical education. This is central both for increasing productivity and for increasing employment. Manufacturing needs technicians and middlelevel managers with a technical background. Otherwise bottlenecks tend to arise which preclude the productivity of other categories of employees from increasing as well. However, in the past very little attention has been paid to technical education. Until 1995 there were only 38 technical schools, with a total enrolment of 5,800. No less than 70 per cent of these schools were private.68

Key inputs: infrastructure A second input bottleneck in the Haitian economy that must be removed if the rate of growth is to increase is the sadly deficient infrastructure. Power cuts occur almost daily, at completely irregular intervals. A mere eight of every 1,000 households in the country have a telephone line, in a system that does not work. (Businesses frequently have to resort to radio-based means of communication.)69 The water distribution system is not dependable and the road system is literally falling apart. Public service delivery is insufficient, untimely, and irregular in most aspects, to the detriment of virtually every single producer in the country. An example of the existing state of affairs is given by the electricity company. At the end of the recent sanctions the situation was desperate: The operations of the electricity company were particularly badly hit [during the sanctions]: no significant new equipment had been

184 Sustained Growth in Haiti: Pipe-Dream or Possibility?

purchased since 1986; spare parts which needed to be imported were unavailable after 1991; and the progressive depletion of oil supplies resulted in continuous interruptions in electricity generation. The production of electricity from thermic plants (which represented about 65 percent of electricity production in 1991) declined from 290 millions of kWh in 1991 to 27 millions of kWh in 1994 ... The decline in thermic plant generation was only partly offset by additional hydroelectric generation. At the beginning of 1994 electricity production at the main hydroelectric plant (in Péligre) was stopped as a result of technical difficulties; by the end of the year electricity was available for only 12 hours a day in Port-au-Prince.70 Today, the situation has changed very little. The production of the Électricité d’Haïti is nowhere close to the existing demand. The generating capacity is too low and about 40 per cent of what is produced is either tapped illegally or disappears due to other non-technical reasons.71 Electricity is available mainly in the capital, but only for a few hours per day during the dry seasons.72 As a result of this, both households and firms have to supplement the public supply with electricity generated by themselves. Effectively, the government has shifted the responsibility for infrastructure to the private sector. Transportation is another case in point. Haiti is a country where roads do not last long, and airports and ports leave a lot to be desired. The road network consists of some 4,500 kilometres, most of which are not paved. Ten ports that can handle medium tonnage vessels and a dozen smaller ports and wharves exist. Finally, Haiti has two international airports and four domestic airstrips.73 Some of the formerly important ports, like the one in Jacmel, were closed down by the Duvalier administrations and left to decay. Adequate maintenance was limited to less than 20 per cent of the paved roads and 4 per cent of the rest. The harbour in Port-au-Prince is congested, deficiently managed, has far too many employees and lacks the necessary equipment.74 It comes as no surprise, then, that it is the most expensive port in the entire Caribbean.75 Altogether, the transport system is characterized by neglect and decay. Here, as well as in the case of electricity, adjustment is forced on the private sector. There is a trade-off between the state of the vehicles and the state of the roads. Ordinary cars are to an increasing extent replaced by four-wheel-drives, at increasing costs. Insofar as ordinary cars continue to be employed, reparation costs increase as the road network continues to deteriorate. However, the trade-off is a limited one.

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The deficient state of the roads severely limits the amount of merchandise that can be transported and increases the time required. To what extent improvement is possible is doubtful. Transportation stands out as one of the least cost-effective areas in the public sector.76 The situation with respect to infrastructure is particularly unfortunate since developments are held back by the on-going debate about privatization of public enterprises. The Électricité d’Haïti, TÉLÉCO, the Port-auPrince harbour and airport, among others, are awaiting immediate decision, but as long as the discussion in parliament remains in a state of paralysis, very little action will be taken to increase efficiency.

Conclusions Our survey of the Haitian economy has not revealed many features that would lead us to believe that sustained growth is imminent. The economy between 1991 and 1994 reached such a low-water-mark that heroic efforts are required just to put it back on the pre-coup level. Sustained growth appears as a very remote possibility – in the best case. In the worst case, per capita income will continue its decline and the pressure to emigrate will increase. In agriculture the cumulative interaction between population growth and erosion continues, and the agrarian reform that is under way fails to address the problem of how to find crops that are both labourintensive and ecologically sound. Thus, we should not expect any reversal of income trends in agriculture in the near and medium-term future. The most dynamic sector in the Haitian economy during the 1970s and 1980s was the export assembly manufacturing firms. The 1991–4 sanctions almost wiped these companies out, and the recovery beginning in 1995 has not yet reached the point where figures are back at the 1991 level. Manufacturing exports face strong competition both from other Caribbean nations and from countries further away, and unless such crucial variables as political stability, physical security, education, and infrastructure undergo a drastic improvement there are no reasons to expect Haiti’s competitiveness to increase over the next few years. In the longer perspective Haiti must break away from low-wage manufacturing if incomes are to improve, but given the dismal educational situation this appears utopian, especially since the country would have to compete with low-priced imports of technologically more sophisticated goods.

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A sector absorbing many people both in rural and in urban areas is handicrafts. This sector was badly hurt by the sanctions, and increasing output and sales may be difficult. The Caribbean market by and large appears to be saturated with Haitian crafts and the sector needs assistance in a number of ways to be able to expand, ranging from close cooperation with manufacturing to targeting of individual artisans. Tourism – one of the most important markets for handicrafts – is often pointed to as a potentially expansive field, but this sector has in the past been subject to more downs than ups. Today, tourism is severely constrained by the lack of infrastructure – notably electricity and transportation – and by the feeling abroad that Haiti is not yet stable and secure enough for tourists. The fact that most economic activities in Haiti are informal poses special problems when it comes to designing strategies for growth and development. Many entrepreneurs want as little as possible to do with the authorities. By the same token they lack the infrastructure that is necessary to increase productivity and incomes. In the past, the Haitian government has made few efforts to break this impasse and in the near future this situation is not likely to change. The analysis of the different sectors of the economy points clearly to the strategical importance of the key inputs in the development process: education and infrastructure. On both these counts, Haiti displays severe deficiencies. The illiteracy rate is the highest in the Western Hemisphere; technical education, necessary for manufacturing, remains rudimentary; the telephone system does not work; electricity is available only at irregular intervals; transportation is a hopeless mess; etc. These are all factors that are difficult to improve at short notice, especially given the very limited resources at the disposal of the Haitian government. Thus, there are no indications that in the foreseeable future Haiti will be able to break out of the economic stagnation and decline that has characterized the country for several decades. The present essay has not dealt with either macroeconomic policy problems or with politics in any detail. These themes have been touched only en passant, for reasons of space. (I have discussed these issues in detail elsewhere and the reader is referred to those writings.)77 However, when these factors are added to the picture, the conclusion that sustained growth in Haiti is a pipe-dream receives further support. During most of the period from the beginning of the 1980s to the present Haiti has experienced severe macroeconomic disturbances as a result of political factors.78 The unhampered plunder by Jean-Claude Duvalier and the clique surrounding him during the first half of the

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1980s led to large budget deficits that were monetized and which by boosting demand caused balance of payments deficits as well. The attempts to stabilize the economy, undertaken by the provisional government that took over in February 1986 was interrupted by the political chaos that ensued in mid-1987, when presidential elections were imminent. Smuggling and under-reporting of company profits undermined the government budget and the rate of inflation increased. Thus, policy reform came to nothing. In 1991, after the election of Jean-Bertrand Aristide to the presidency, a second stabilization effort was made. This time, the endeavour was interrupted by the coup d’état at the end of September that ousted Aristide. During the next three years, per capita income dropped catastrophically, as we have seen in the foregoing, and the economy experienced another macroeconomic disequilibrium, with a severe breakdown of the tax administration and conversion of a balance of payments surplus into a huge deficit as a result of capital flight and suspension of foreign aid. Again, policy-making was back to square one, but at a drastically lower per capita income. A third round of policy reforms was initiated by the government of René Préval, in 1996.79 These reforms are of the standard IMF–World Bank type. What their eventual fate will be is doubtful. The political process works to the advantage of economic growth. The government budget was voted in parliament with few months left of the fiscal year both in 1996 and 1997 and the Haitian political scene remains one of confrontation rather than one of cooperation. Following the first round of senatorial elections in April 1997 communication between the main two political groupings broke down completely. In June the prime minister resigned. It would take one and a half years before a successor could be appointed, because of stern opposition in parliamentary circles. The gap between President René Préval and his predecessor, Jean-Bertrand Aristide, who handpicked Préval to succeed him, widened day by day. Parliament was dissolved at the beginning of 1999. The following year parliamentary elections were held, elections that were denounced as fraudulent by the opposition against Aristide and his Fanmi Lavalas grouping. The opposition chose to boycott the presidential elections in November, so Aristide was elected to his second term without opposition. Unfortunately, the two elections held in 2000 have not solved Haiti’s political problems. If anything, they have contributed to worsen them. The rift between President Aristide and the political opposition is both deep and wide. The political mechanism continues to be paralyzed.

188 Sustained Growth in Haiti: Pipe-Dream or Possibility?

How long this will continue remains to be seen, but as long as the paralysis remains the economy will not move forward. Stagnation and decline will continue to carry the day.

Notes * A preliminary version of this essay was presented at the 12th Annual ASERCCA Conference, Portsmouth 19–21 September 1997, and at the 1st Södersten Seminar, Lund, 9 December 1997. Thanks are due to Yves Bourdet and two anonymous referees for constructive comments to that version. 1. 2. 3. 4. 5. 6.

7. 8. 9. 10. 11. 12.

13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29.

World Bank (1997), p. 4; FAO (1996), p. 7. World Bank (1997), p. 4. Ibid. See Lundahl (1979), chapter 5, for a detailed discussion. FAO (1996), p. 19. One may ask the question whether some mechanism à la Ester Boserup (1965), when population growth stimulates technological progress, will not act as a brake on this tendency. However, this is not the case. Technological change has by and large been absent from rural Haiti. See Lundahl (1979), chapter 12, for an extensive discussion of the reasons. Cf. Rybczynski (1955). Lundahl (1979), pp. 195–204; Stevenson (1989). Daskal (1996), p. 7. Ibid., p. 10. FAO (1996), p. 4. Lundahl (1979), pp. 214–20; Bourdet and Lundahl (1991). These tendencies were reinforced during the 1991–4 sanctions, when export markets were cut off and oil prices skyrocketed. Lundahl (1997b), p. 5. Locher (1988), pp. 15–16. Gagnon (1996), pp. 14–17. World Bank (1997), p. 4. World Bank (1996), p. 2. Lundahl (1979), p. 630. World Bank (1996), pp. 4–5. Ibid., p. 2. Open Society Institute (1997), p. 3. Ibid., p. 1. IMF (1996b), p. 15. Evalyasyon premye faz ref òm agrè nan Latibonit (n.d.), pp. 4–6. IMF (1996b), p. 15. Evalyasyon premye faz refòm agrè nan Latibonit (n.d.), p. 11, lists the criteria that must be met by those who are to receive land. Personal communication from T. Anderson White, Port-au-Prince, 8 May 1997. Ibid. FAO (1996), pp. 54–6.

Mats Lundahl 189 30. Interviews with representatives of coffee producers in Cayes-Jacmel, 6 May 1997. 31. Personal communication from Rubén Silié, Port-au-Prince, 15 May 1997. 32. Ibid. 33. Lundahl (1997a), pp. 76–80. 34. Inter-American Development Bank (1995), p. 36. 35. Lundahl (1997a), pp. 80–1; (1997b), p. 6. 36. World Bank (1981), p. 23. 37. Lundahl (1992), pp. 409–11; (1997a), p. 81. 38. Inter-American Development Bank (1995), p. 36. 39. On this point I am indebted to Johnny Handal for a stimulating conversation, Port-au-Prince, 3 May 1997. 40. Interviews with Rémy Montas, Prime Minister’s Office, Port-au-Prince, 2 May 1997, and Leslie Delatour, Banque de la République d’Haïti, Port-auPrince, 7 May 1997. The 1996 figure comes from Enquête industrielle, Août 1996, Résultats préliminaires, Capital Consult, Port-au-Prince. 41. IMF (1995), p. 5; (1996a), p. 10. 42. Capital Consult (1995). 43. Information from the Prime Minister’s Office, Port-au-Prince, 2 May 1997. 44. Capital Consult (1995). 45. Lundahl (1997a), pp. 83, 85–7. 46. See, e.g., Lundahl (1979), chapter 10; Tardieu (1990); and Prou (1997), for an overview. 47. Capital Consult (n.d.). 48. Ibid. 49. An excellent synthesis of the problems of handicrafts is found in Fleurant and Mangonès (1996). 50. Ibid., pp. 1, 10–11 and annex 3. 51. Ibid., pp. 12–15. 52. Ibid., pp. 16–17. 53. The following is based on Lundahl (1992), pp. 412–13. 54. The other ‘H’s’ were homosexuality, heroin and hepatitis. 55. IMF (1995), p. 3. 56. Le Nouvelliste, 17–19 March 1995. 57. Lundahl (1992), p. 412. 58. IMF (1996b), p. 16. 59. GHRAP (1995), p. 66. 60. Ibid., pp. 64–5. 61. Interview with Bernard Craan, Centre pour la Libre Entreprise et la Démocratie (CLED), Port-au-Prince, 2 May 1997. 62. Lundahl (1979), chapter 10; Tardieu (1990). 63. Lundahl (1979), p. 478. 64. The details of this are found in ibid., chapter 10. 65. Mure-Ravaud and Rodd (1997), pp. 25–6. 66. Ibid., p. 3. 67. Ibid., p. 37. 68. Silié and Hasbum (1996). 69. World Bank (1996), p. 14. 70. IMF (1995), pp. 3–4.

190 Sustained Growth in Haiti: Pipe-Dream or Possibility? 71. 72. 73. 74. 75. 76. 77.

IMF (1996b), p. 18. World Bank (1996), p. 14. Ibid., p. 17. Ibid., p. 14. IMF (1996b), p. 13. Ibid., p. 17. See Lundahl (1979), (1983), (1992), (1997a) (1997b), and Lundahl and Silié (1998). The latter essay complements the present one. 78. Lundahl and Silié (1998). 79. Actually, the reforms were begun by Aristide, after his return to Haiti in 1994, but Aristide subsequently turned against his own reform commitments.

References Boserup, E. (1965) The Conditions of Agricultural Growth: The Economics of Agrarian Change under Population Pressure, London: George Allen & Unwin. Bourdet, Y. and M. Lundahl (1991) ‘Patterns and Prospects of Haitian Primary Exports’, Latin American Issues, no. 9. Capital Consult (1995) Compétitivité des industries d’Haïti, Étude realisée pour le compte de la Commission Présidentielle pour la Croissance et la Modernisation Économique, 12 December, Port-au-Prince. Capital Consult (n.d.) Étude exploratoire pour l’implantation de zones franches en Haiti, Préparée pour le compte de la Commission Présidentielle pour la Croissance et la Modernisation Économique, Port-au-Prince. Daskal, J. (1996) ‘Sanctions on Haiti: What Were the Costs?’, Cambridge UK and Cambridge MA: King’s History and Economics Centre and Harvard Center for Population and Development Studies. Evalyasyon premye faz refòm agrè nan Latibonit (n.d.) Port-au-Prince: Biwo rejyonal INARA nan Latibonit. FAO (1996) Haïti: Analyse du secteur agricole et identification des projets. Rapport sectoriel (final), Volume I de III: Rapport principal, 75/95 TCP-HAI 23, 3 July, Port-au-Prince. Fleurant, G. and K. Mangonès (1996) Haitian Artisans: Giving Shape to One’s Vision and Ideas: An Assessment of the Haitian Handicraft Sector, January, Port-au Prince. Gagnon, G. (1996) ‘Food Security Issues in Haiti’, Final Draft, Washington, DC: World Bank. GHRAP (Groupe Haïtien de Recherches et Action Populaire) (1995), ‘Dossier sur l’évolution de l’économie haïtienne 1980–1994’, Port-au-Prince, mimeo. IMF (1995) Haiti – Recent Economic Developments, SM/95/43, 1 March, Washington, DC: International Monetary Fund. IMF (1996a) Haiti – Staff Report for the 1996 Article IV Consultation and Request for Arrangements under the Enhanced Structural Adjustment Facility, EBS/96/153, Washington, DC: International Monetary Fund. IMF (1996b) Haiti – Enhanced Structural Adjustment Facility – Economic Policy Framework Paper for FY 1996/97–1998/99, EBD/96/128, Washington, DC: International Monetary Fund.

Mats Lundahl 191 Inter-American Development Bank (1995) Haiti. Emergency Economic Recovery Program. Report of the Joint Mission (November 7–20, 1994), Washington, DC: IDB. Locher, U. (1988) ‘Land Distribution, Land Tenure and Land Erosion in Haiti’, paper presented at the 12th Annual Conference of the Society for Caribbean Studies, Hoddesdon, Hertfordshire, 12–14 July. Lundahl, M. (1979) Peasants and Poverty: A Study of Haiti, London: Croom Helm. Lundahl, M. (1983) The Haitian Economy: Man, Land and Markets, London and Canberra: Croom Helm. Lundahl, M. (1992) Politics or Markets? Essays on Haitian Underdevelopment, London and New York: Routledge. Lundahl, M. (1997a) ‘The Haitian Dilemma Reexamined: Lessons from the Past in the Light of Some New Economic Theory’, in R. I. Rotberg (ed.), Haiti Renewed: Political and Economic Prospects, Washington, DC: Brookings Institution Press. Lundahl, M. (1997b) ‘Towards the Abyss? The Political Economy of Emergency in Haiti’, Helsinki: WIDER. Lundahl, M. and R. Silié (1998) ‘Economic Reform in Haiti: Past Failures and Future Success?’, Comparative Economic Studies, vol. 40. Mure-Ravaud, G. and A. Rodd (1997) Éducation, Examen des dépenses publiques d’Haíti. Note No. 7, March, Washington, DC: World Bank. Open Society Institute (1997) Haitian Boat People: Causes and Methods of Migration. Special Report, April, New York, NY: Forced Migration Projects. Prou, M. E. (1997) ‘Haitian Education under Siege: Democratization, National Development, and Social Reconstruction’, in R. I. Rotberg (ed.), Haiti Renewed: Political and Economic Prospects, Washington, DC: Brookings Institution Press. Rybczynski, T. M. (1955) ‘Factor Endowment and Relative Commodity Prices’, Economica , N.S., vol. 22. Silié, R. and D. Hasbum (1996) Situación de la enseñanza técnica y formación profesional de la República de Haití, Consultancy report for the Organización de Estados Iberoamericanos (OEI). Santo Domingo. Stevenson, G. G. (1989) ‘The Production, Distribution, and Consumption of Fuelwood in Haiti’, Journal of Developing Areas, vol. 24. Tardieu, C. (1990) L’éducation en Haïti de la période coloniale à nos jours (1980), Port-au-Prince: Imprimerie Henri Deschamps. World Bank (1981) Haiti: Economic Memorandum. Recent Economic, Industrial and Sector Development, Report No. 3079-HA, 17 February, Washington, DC: World Bank. World Bank (1996) Memorandum of the President of the International Development Association to the Executive Directors on a Country Assistance Strategy of the World Bank Group for the Republic of Haiti, Report No. 15945-HA, 13 August, Washington, DC: World Bank. World Bank (1997) Haiti: The Challenges of Poverty Reduction, 24 March, Discussion paper presented at the Haiti Consultative Group Meeting, 2–4 April, Port-au-Prince.

9 The Performance of the Manufacturing Industry under Adjustment: The Case of Trinidad & Tobago Philomen Harrison

Introduction There is no denying the importance of an adjustment programme in its goal of repositioning economies on a path of increasing private investment and sustainable growth. Most developing countries have over the last three decades been subjected to stabilization and structural adjustment programmes of the International Monetary Fund (IMF) and the World Bank. These programmes were implemented in response to a series of shocks experienced by developing countries. The central question of this chapter is to investigate the impact of adjustment on private investment focusing on selected manufacturing industries in order to explain why the expectations of adjustment policies, increased investment and growth, are not necessarily realized. The expectations were that adjustment policies should be favourable to producers in the private sector, specifically the traded goods sector, through: (i) the creation of a stable macroeconomic environment for entrepreneurs; and (ii) the use of market determined price incentives. Intended outcomes included increased volume and efficiency of private investment and its productivity, improved international competitiveness and the expansion of exports. Private investment response to market determined price incentives should have led to increased economic growth. The performance of private investment in many developing countries in the period of the 1980s showed significant decline, along with a slowdown in growth.1 In comprehensive surveys on this issue Serven and Solimano (1992 and 1993) stated that both public and private 192

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investment rates declined, with the decline in the latter being more severe. In many countries there was not any marked response in private investment to adjustment. In other countries the ability to restore profitability and correct imbalances was possible only through heavy cuts in real wages. The failure of private investment to recover has implications for the sustainability of economic growth. Trinidad and Tobago approached the IMF and the World Bank in the late 1980s, for financial support and assistance in economic recovery. The formal implementation of these policies is pinpointed to 1988. Despite being the recipient of commodity booms in the 1970s, the early 1980s saw the appearance of fiscal and external deficits, increased unemployment and indebtedness, followed by other macroeconomic disturbances. In assessing the impact of macroeconomic adjustment policies on private investment, this chapter seeks to explain why macroeconomic outcomes are not always in keeping with expected outcomes by exploring features that can contribute to differentials in adjustment effects and response. The concept of the microeconomic unit that underlies adjustment is that of ‘a representative firm’ operating under conditions of homogeneity, facing similar market prices and responding with the same degree of flexibility to relative price changes. However, the historical evolution of private sectors in developing countries leads to differences related to firm size, financial market behaviour, resource availability/use, and market focus which may affect the impact of and the response of firms to changes in the macroeconomic environment. The recovery of the private sector through increased productive investment may not be an immediate occurrence. As an example, a large firm with traditional links with banks may have easier access to capital in adjustment than a small firm without these links. The chapter focuses on selected manufacturing industries which are Food Processing; Drink and Tobacco; Textiles, Garments, etc.; and Assembly and Related activities. The main rationale for selection are the limitations with regard to the extent of the inquiry.2 The subindustries of Food Processing, Drink, etc., include meat processing, dairy products, alcoholic and non-alcoholic beverages, tobacco processing, confectionery, jams, etc. This is the largest branch within industry, producing mainly for the domestic market but it also has some penetration of the export market. The Textile and Garment industry, which includes manufacturing of garments, footwear and headwear, has been traditionally a labour-intensive one, largely employing cheap female

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labour and fraught with problems caused by garment imports. The Assembly industry has been noted for the use of imported CKDs (Completely Knocked Down components) with the import content of this industry very high and the market focus domestically oriented. This industry comprises assembling of consumer durables such as refrigerators, stoves, washing machines, motor vehicles, batteries, manufacturing of metal building materials, metal furniture, structural steel fabrication, etc. Together, the three branches provide a fairly representative picture of industry in Trinidad & Tobago. The chapter continues in section 2 with a brief look at the content of stabilization and adjustment policy measures. Section 3 gives insights into the industrialization policy framework in Trinidad & Tobago. An overview of the macroeconomic performance is contained in section 4. Key results of the industry analysis on the effect of adjustment at the micro-level are discussed in section 5. Conclusions follow in section 6.

Selected adjustment policy measures Policy expectations and criticisms Table 9.1 shows expectations and some criticisms of the impact of selected policies of adjustment on private investment. Structural adjustment as part of adjustment programmes is aimed at long-term structural change through changes in relative prices (Thomas et al., 1991). Stabilization is aimed at achieving a sustainable balance of payments (BOP) position in the short to medium term, with price stability through a low inflation rate being another objective. The orientation in these policies is towards the shifting of resources to more efficient investment in the economy bringing about systemic structural changes and economic growth through the use of price incentives. This structural shift can be achieved through trade and exchange rate policies, financial reforms, public sector management, etc. The incentives include the shifting of relative prices away from non-traded to traded activities through liberalization of the exchange rate, interest rates and domestic and external factors and product markets. The resulting ‘right’ price signals enable private sector investment response. Financial liberalization Financial liberalization comprises the freeing-up of the financial system in developing countries aimed at achieving greater financial

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efficiency.3 Included in these measures is the dismantling of controls on credit allocation and interest rates.4 The basis for the approach to financial liberalization is the view that the development process has been retarded by the distortion of interest rates, resulting in a reduction in the real rate of growth and the real size of the financial system and the lack of a dynamic investing private sector. The repression of interest rates, reflected in negative real interest rates, is seen as inducing inefficiencies in resource allocation for investment. The main expected outcome of financial liberalization is increased savings for investment and increased efficiency of the resulting investment. However, the effect of increased interest rates can lead to increased cost of working capital for production and also increased investment costs, reducing private investment. Portfolio shifts between assets and the shifting of funds from the informal financial market to deposits in the formal financial system are possible outcomes of financial liberalization, which can reduce private investment Ip (Taylor, 1983 and 1990). Strict credit requirements in the formal sector (as compared to the informal) results in a reduction of availability of funds to small and medium firms, while they are also faced with reduced availability of credit in the informal financial market The ineffectiveness of the interest rate in achieving efficient allocation of resources was articulated by Stiglitz and Weiss (1981), basing their arguments on credit rationing and imperfect information with the lender using the interest rate as a device to sift out risky borrowers. The outcome is inefficiency in loan allocations and credit rationing since identical borrowers may have different outcomes of loan applications. Efficient investors may also be discouraged which impacts on both the volume and quality of the resulting investment. From the discussion above, the following issues arise relative to the impact on private investment under financial liberalization: (i) increasing the interest rate does not necessarily lead to increased investment through increased savings since portfolio shifts may occur into financial investment rather than productive investment; (ii) small and medium firms may be unable to finance investment due to increased financial intermediation that shifts savings from informal to formal markets, along with the attendant difficulty of small and medium firms in qualifying for loans in the formal financial system; and (iii) in the context of credit rationing and asymmetric information the interest rate may be rendered dysfunctional in increasing the volume and efficiency of private investment.

196 Manufacturing under Adjustment: Trinidad & Tobago

Exchange rate policy Exchange rate policy is aimed at a switch in the pattern of expenditure in favour of goods and services of the devaluing country through a reduction in the demand for imports and an increase in the demand for exports. This result is achieved through the raising of the domestic currency price of imports and a reduction of the foreign currency price of exports. It is possible that a nominal devaluation is not translated into becoming a real devaluation, since producers can raise the mark-up on their unit costs, or wages can increase by the amount of the devaluation, thereby negating its effect. Therefore a crucial issue for a devaluation to be effective is that the nominal wage rate should remain constant (FitzGerald, 1993).5 Devaluation therefore has redistributive income effects that can be contractionary (Krugman and Taylor, 1978). The impact of a devaluation on supply through raising the incentives to produce exports is said to be more important than the demand switching effect, i.e. away from imports (Killick, 1984). For a devaluation to be effective the Marshall–Lerner condition should hold, i.e. the elasticity of demand for imports plus the elasticity of demand for the country’s exports should be greater than one. In the short run, exports are not very responsive to price changes, and therefore economic contraction may occur because of capacity constraints in production while imports of foreign raw materials become more costly for production to be continued on the same scale. High import content of production adversely affects the competitiveness of exports as well as the profitability of the firm. The strong dependence of production in developing countries on imported inputs justifies its inclusion as a cost component in the production structure.6 Small producers may not have the experience or finance to penetrate export markets as some of the larger firms have. Similarly specific industries that are domestically oriented cannot immediately change to exports. While the policies of adjustment are aimed at increasing the competitiveness of economies in order to achieve sustainable growth and development the expectations and outcomes may therefore not coincide.

Industrialization in Trinidad & Tobago: the policy framework The main phases of industrialization in Trinidad & Tobago can be divided into the pre-Independence and pre-oil-boom phase (1950s to 1973),

Table 9.1 Selected adjustment policies as they impact on private investment Policy

Desired effect on Ip

Transmission to Ip

Rationale for adjustment

Criticism

Ip↑

Credit directed to the private sector, stabilization enables Ip

High inflation which is monetary in nature, distorted credit allocation in favour of public sector

Adverse effect on Ip through high interest rate, high cost of bank credit

Ip↑ & efficiency

i↑⇒ Sp↑⇒ lp

Increased & positive real interest rates on deposits leads to higher savings; low and negative real lending rates lead to credit distortions and inefficient Ip through financial repression

Sp is not interest elastic; neither does Sp⇒ Ip

Ip↑

Sp↑

Ig crowds out Ip to finance deficit.

Ig and Ip complementary

4. Tax policy revision

Ip↑

Sg↑

Less reliance on Sp to finance fiscal deficit, crowding in Ip

Ricardian equivalence

Exchange rate policy

Ip↑

Increased international competitiveness, shift production into tradables

Overvalued exchange rate

Counterproductive, increases cost of production

Trade liberalization

Ip↑

Increased allocation of resources in tradables

Greater market access for exports,induces efficiency through increased foreign competition

Infant industry – cannot compete internationally

Monetary policy 1. Reduced monetary growth/credit direction Financial policy 2. Interest rate deregulation, dismantling credit controls

Fiscal policy 3. Reduced government expenditure;

197

Note: Ip: private investment; Ig: government investment; Sp: private saving; Sg: government saving.

198 Manufacturing under Adjustment: Trinidad & Tobago

the oil-boom period (1974–81), and the post-oil-boom and adjustment period (1982–94). It is impossible in the discussion below to give a comprehensive picture of policies and performance in its entirety. Pre-Independence to the pre-oil-boom period: the 1950s to 1973 In the early periods, the economy of Trinidad & Tobago was dominated by sugar, and then by petroleum after its discovery in the early twentieth century. The development of indigenous manufacturing pursuits were at a distinct disadvantage as compared to foreign firms due to a colonial-based monetary system, the fact that production was geared to satisfying external demand, and the unavailability of imported technology. The colonial policy did not favour industrialization in the British West Indies including Trinidad & Tobago, which formed the basis of Lewis’s challenge. The resultant industrialization thrust in Trinidad & Tobago consisted of the setting-up of ‘secondary industries’ with a number of incentives, including (St Cyr, 1981):

duty-free concessions on imports of capital equipment; exemptions from payment of income tax for five years; unlimited carry-over of losses from one year to the next; tax-free distributions of profit; the establishment of the Industrial Development Corporation (IDC) in 1958 which monitored incentives including industrial sites, factory shells; the setting-up of a ‘negative list’ that limited imports of products that were manufactured locally.

While these policies improved to some extent the social and economic infrastructure and provided incentives for enterprises to develop, they also led to a fiscal squeeze (St Cyr, 1981). The strategy as implemented failed to reduce unemployment and inequality in the country, and it did not diversify the economy away from the dependence on oil.7 The establishment of the Caribbean Free Trade Area (CARIFTA) in 1968 also led to legislative amendments and higher import charges for goods from outside the Caribbean region. The content of monetary and financial policies was primarily for the mobilization of domestic financial resources through the encouragement of investment and the penalizing of consumption. This included the establishment of reserve requirements for commercial banks and effecting exchange controls over foreign currencies. Commercial policy was also aimed at protecting potentially viable industries and encouraging manufactured exports.

Philomen Harrison 199

Political and social upheavals in 1970, in the form of Black Power demonstrations, led to a nationalization thrust in sugar, petroleum and banking (formerly all foreign owned) and the setting-up of a Small Business Unit of the IDC in 1970. The oil boom of the 1970s facilitated the nationalization of key sectors and the strategy of resource-based industrialization. The above scenario was one of protection and subsidization, the argument being that these policies were necessary at the time to aid the development of industry at least in the short to medium term. To the extent that the development of industry did not outgrow or could not survive without these policies in the longer term, there are implications with regard to the achievement of international competitiveness, increased profitability, investment and export-orientation. The oil-boom period: 1974–81 With the oil-boom of the 1973–74 and 1978–79, the government proceeded to invest in oil-based industries such as methanol, urea and ammonia production. The role of government in economic activity was intensified as reflected in increased public sector employment – government workers comprising approximately 18 per cent of the employed in the 1960–70 period as compared with over 30 per cent in the 1980s.8 There was heavy state investment, overshadowing private investment. In the late 1980s the Export Development Company (EDC) was set up to assist firms in expanding their export base. The Small Business Development Company Limited (SBDC) was also established in the late 1980s to enhance small business development. The oil-boom had its negative consequences in the traded goods sector in the form of the ‘Dutch disease’ effects. This period marked the beginning of the problems relative to the need for structural adjustment in Trinidad & Tobago through the impact that was felt after the boom (Harrison, 1994). The post-oil-boom and adjustment period: 1982–94 With the end of the oil-boom the reduction in government revenues left the economy with fiscal and external deficits.9 Exchange controls were introduced to limit demands on foreign reserves. The period of the 1980s saw the start of efforts at economic restructuring such as the streamlining of public expenditure, current and capital, resulting in high unemployment. The incentive structure of the private sector also changed. The deteriorating balance of payments and foreign reserves position culminated in a 50 per cent devaluation in 1985 with a dual

200 Manufacturing under Adjustment: Trinidad & Tobago

exchange rate regime being introduced. Imposition of a ban on garment imports other than for personal use was applied in 1985 to protect this industry. In 1987, with a change of government in late 1986, the new government embarked on a medium-term adjustment programme. Main adjustment policies The official adjustment programme started in 1988–9 but, unofficially, measures such as cuts in salaries of public officers, and tightening of liquidity, started in 1987. The adjustment programme was supported by two Stand-by Arrangements on 25 January 1989 and 27 April 1990 with the International Monetary Fund (IMF) and a Structural Adjustment Loan. Monetary and financial policies were among the earliest measures used in the application of adjustment, which had a bearing on private investment. Specific elements applied were:

A devaluation of 50 per cent in 1985 was followed by unification of the exchange rate and a further devaluation of 17 per cent in 1988; Reduction of exchange controls on visible trade items; Tax reform including the reduction of both personal and income-tax levels and the implementation of a 15 per cent value-added tax (VAT); Liberalization of the trade regime – dismantling of negative list by removal of 40 per cent of items in 1988 which were subjected to import prohibition; Contractionary monetary policy through reduced growth rate of money supply, particularly in 1988, restriction of credit to state enterprises, increase of rediscount rate in 1983 and 1988; Maintenance of positive real lending interest rates from 1984; Further devaluation of the exchange rate by 35 per cent and managed floating in 1993.

Selected manufactured products that had been barred from imports were gradually removed from this negative list until 1995, when the negative list disappeared. Proposed reduction of tariffs proceeded at a slow pace. There was a decrease in the import duty tariff to 60 per cent in 1994 and scheduled reductions of 30 per cent in 1995 and 1996, and 20 per cent in 1997. The common external tariff (CET) with the Caribbean region was also to come into effect by 1997. These tariff rates were pushed back and the CET was scheduled for implementation by June 1998.

Philomen Harrison 201

Private sector framework incentives were improved through financial, monetary and trade policies: exchange rate devaluation to fuel exports thrust through increasing international competitiveness; trade liberalization through tariff reductions and disbanding of import restrictions; and tax reforms. The ultimate aim was to achieve closer integration into the world economy and investment for economic diversification. In effect, the policy goal for the Medium-Term Policy Framework 1994–6 (Republic of Trinidad & Tobago, 1993) was to increase the participation of the private sector as the primary source of incremental investment and growth, including the promotion of exports as the ‘foundation of economic growth and employment generation’ (Republic of Trinidad & Tobago, 1993: 2). While it is argued that financial repression was not acute in the case of Trinidad & Tobago, measures such as credit guidance with respect to loans, changes in reserve requirements, rediscount rates and exchange controls, created a situation of financial repression. An indicator of financial repression is the presence of negative real interest rates, which will be discussed in the next section. The passing of the Central Bank Act of 1978, the use of moral suasion and the varying of the rediscount rates and bank rates, served to produce a rate of interest that can be said in a strict sense not to be market-determined. In the context of Trinidad & Tobago, financial repression, therefore, did not take the conventional form of interest rate ceilings or the direction of credit to particular sectors or groups of firms as is normally articulated in the literature on financial liberalization. In the late 1990s the former Industrial Development Corporation (IDC) mentioned earlier was streamlined and merged with the EDC to form the Tourism and Industrial Development Corporation (TIDCO). With the advent of TIDCO special trade facilities were also established to assist firms in increasing participation in external trade.

An overview of economic performance of Trinidad & Tobago Relative price movements Table 9.2 shows the price incentives under which the private sector operated over time. The real exchange rate (RER) defined as the price of traded to non-traded goods appreciated during the periods 1974–80 and 1981–7. This appreciation was primarily through ‘Dutch disease’ effects of the oil boom of the 1970s.10 The real depreciation in the

202 Manufacturing under Adjustment: Trinidad & Tobago Table 9.2 Selected relative prices, period averages, 1966–98 Variable

1966–73

1974–80

1981–87

1988–94

1995–98

Real exchange rate (RER), Index Minimum wage rate, Index – real lending rate (RLEND) – real deposit rate (RDEP) Inflation rate (INFL)

168.7

163.2

124.0

126.0

136.8

43.5

125.4

396.2

472.8

533.5

2.5

4.5

1.2

3.8

8.5

1.3

9.9

5.4

2.6

1.4

6.1

14.8

10.6

8.6

4.6

Sources: Own elaboration on the basis of data from various statistical reports of the Central Statistical Office, Trinidad & Tobago (base year 1985100 for indices).

RER

200.0 150.0 100.0 50.0 0.0 66

19

70

19

74

19

78

19

82

19

86

19

90

19

94

19

98

19

Figure 9.1 Bilateral real exchange rate with the US

period 1988–94 reflected the devaluation and supporting measures such as wage reductions etc. during that period. The managed floating of the exchange rate reflected a depreciation of approximately 8.6 per cent in the period 1995–8. Closely related to a devaluation is the movement in real wages. There was an increase in the minimum wage (entry level in selected industries) in the 1988–94 period of about 19.3 per cent over the previous period, which served to offset the devaluation of 15 and 33 per cent during 1988–94. Figure 9.1 shows the movement in the RER in which real devaluation seemed to have lagged behind nominal devaluation for the years 1985 and 1988 but was realized for the devaluation of 1993. Nominal interest rates on loans and deposits were slightly higher during the period 1988–94 compared to the period preceding adjustment. The rate of inflation (measured by the change in the Consumer Price Index – 䉭CPI) was at its peak of 22 per cent in 1974 during the

Philomen Harrison 203 30.0 20.0 INFL

10.0 %

RLEND 0.0

RDEP

1966 1970 1974 1978 1982 1996 1990 1994 1998 –10.0 –20.0 Year Figure 9.2 Real lending and deposit rates and the rate of inflation

first oil boom, contributing to high negative real lending and deposit rates of interest in that year. Pre-oil-boom (before 1974) rates of inflation ranged from about 2–10 per cent, to average 6 per cent for the early period 1966–73. In the period 1981–7, prior to the start of adjustment, the rate of inflation was on average 10.6 per cent, reducing to approximately 9 per cent during the period 1988–94. In the more recent period (1995–8) the real lending rate increased from 3.8 to 8.5 per cent while the real deposit rate finally became positive but at a very low level 1.4 per cent. These real rates of interest were supported by low inflation rate in this period of 4.5 per cent rather than by decreasing nominal rates that in fact increased (see Figure 9.2). The spread between the nominal lending and deposit rate is a contributory factor to negative deposit rates for most of the years as reflected in the period averages, and is indicative of gains made by banks. Macroeconomic outcomes Growth rates real GDP There was negligible growth in real GDP in 1988–94 at the height of adjustment, as shown in Table 9.3. Traded sector growth rate was 2.3 per cent in this same period, with agriculture growing at 5.3 per cent and manufacturing at 1 per cent. The Textile/Garments industry contracted by as much as 8.7 per cent. The small positive growth in Assembly was due to the opening of a massive iron and steel plant by the state in 1988. Excluding this industry the growth rate of Assembly will be large and negative. The basis of traded growth in agriculture relied on sugar.

204 Manufacturing under Adjustment: Trinidad & Tobago Table 9.3 Growth rates, period averages (1985100) Sector

Agriculture Petroleum Manufacturing Food processing Textiles/garments Printing/paper Wood Chemicals Assembly Miscellaneous Traded Non-traded Total GDP

Period 1966–73

1974–80

0.8 0.2 10.1 7.7 4.7 10.1 7.7 7.7 17.6 15.6 6.4 3.7 3.1

3.2 2.6 5.6 5.9 0.7 1.3 4.2 1.6 10.7 1.9 3.3 11.4 7.0

1981–87 0.9

2.0 3.9 0.7 8.0 5.5 11.6 2.5 8.7 0.4 2.8 4.6 3.5

1988–94

1995–98

5.3

4.5

1.1 0.5 8.7 0.2 6.2 4.6 1.5 10.2 2.3 0.4 0.0

0.7 5.5 5.2 6.8 5.7 10.0 10.8 1.2 6.5 2.7 4.8 3.5

0.3

Sources: Central Statistical Office, Republic of Trinidad & Tobago, National Income Reports (several years).

Data for the period 1995–8 shows the more recent economic performance of the country. Real GDP rose by 3.5 per cent annually. There was also some recovery of the manufacturing sector which increased in this period by 5.5 per cent, largely due to the food processing industry (5.2 per cent), while textiles (6.8 per cent) and assembly (1.2) experienced negative growth. The chemical and non-metallic minerals sector, which is closely aligned to the construction sector (cement, bricks and blocks) also contributed to the growth in manufacturing with 10.8 per cent. Investment, private and public Total investment to GDP and public and private investment decreased during 1988–94. In the 1995–8 period investment increased largely due to foreign direct investment in the energy sector and other government projects such as the airport expansion and other public construction. Private savings increased slightly in the 1988–94 period. In the 1995–8 period both private and public savings improved with the former increasing marginally (see Table 9.4). Available data on the industry breakdown of investment showed that for the manufacturing sector investment fell in the food processing

Philomen Harrison 205 Table 9.4 Savings and investment as per cent of GDP (period averages, current prices) Variable

1966–73 1974–80 1981–87 1988–94 1995–98

Sp Sg Ip Ig

13.6 5.0 13.5 10.9

24.6 9.0 15.0 12.1

17.6 0.02 11.6 12.2

19.3 1.4 9.0 5.5

20.8 2.8 15.3 11.2

Sources: Republic of Trinidad & Tobago, Central Statistical Accounts and National Accounts Reports (several years), and own elaboration.

industry from 11.5 per cent of its GDP in 1981–7 to 9 per cent in 1988–94. In the textile industry, investment also fell from 26.2 per cent of its GDP in 1981–7 to 24 per cent in 1988–94. For the assembly sector there was increased investment between these two periods, 35.7 per cent to 42 per cent, but this was largely due to investment in a massive iron and steel plant. Internal and external balances, monetary and debt ratios In Table 9.5 the rate of growth of domestic credit to GDP for the public and private sector shows the effect of the oil-boom in the 1974–81 period when government was the recipient of revenue from oil. The debt ratios increased during the immediate post-oil-boom and adjustment periods, reflecting the economic problems facing the economy. The fiscal deficit (including public sector enterprises) was negative throughout all five periods. The improved current account deficit in the 1988–94 period was due to favourable oil prices in the 1990s as well as the sale of some state enterprises, which increased the public sector balance (Sg-Ig) and also seems to have improved the current account balance. The period 1995–8 saw the current account in deficit. Total debt to exports and the debt service ratios showed slight improvement in 1995–8. The total debt to GNP ratio worsened and the ratios in general remained relatively high. Changes in critical variables underscore the problems that the economy is still facing despite some positive indicators. The industry contribution to GDP The economic structure of Trinidad & Tobago in Table 9.6 reflects the dominance of the petroleum sector. Table 9.6 shows the industry

206 Manufacturing under Adjustment: Trinidad & Tobago Table 9.5 Debt ratios, monetary variables, fiscal and current account deficits (period averages) Item

1966–73

DCg/GDP growth 5.3 DCp/GDP growth 18.7 M2 growth 17.1 Fiscal deficit/GDP 5.9 Current account 5.7 deficit/GDP Total debt/exports (%) 27.0 Total debt/GNP (%) 12.5 Debt service/exports (%) 3.9

1974–80

1981–87

1988–94

1995–98

25.7 21.5 27.6 3.2 6.4

1.1 30.6 9.1 12.1 6.1

17.6 34.8 2.9 6.1 3.3

9.5 29.3 8.2 11.8 3.4

19.4 10.6 3.5

63.3 23.8 11.9

110.6 50.1 18.2

106.2 61.7 17.5

Note: Data on debt ratios relate to the period 1995–7. Sources: IMF, International Financial Statistics, several years; Republic of Trinidad & Tobago, Central Statistical Office, Annual Statistical Digests and National Income Reports (several years); World Bank, World Debt Tables; Government of Trinidad & Tobago, Review of the Economy (several years).

contribution to GDP by period, in current prices. The petroleum sector (which reflects natural gas, petroleum and petrochemicals) is the largest single contributor to GDP for all the periods, reaching a peak of 41 per cent in the oil-boom period 1974–81. In the period 1966–73, petroleum contributed 38 per cent of total government revenue and 79 per cent of total export earnings, while for the oil-boom period these figures were 68 per cent of government revenue and 90 per cent of exports. The contribution of the services sector has been consistent, with transport, distribution, construction and government being the main contributors of these sectors to GDP. The small increase in the manufacturing sector in the period 1988–94 arose from the food processing sector with a few large firms penetrating export markets abroad and also a large firm in the iron and steel subindustry of assembly. There were some gains from adjustment even though the sustainability of these gains is questionable in the light of the decline in the contribution of these sectors in 1995–8. In constant prices (not shown in tables) the contribution of the manufacturing sector to GDP increased by 0.3 percentage point from the period 1981–7 to the period 1988–94, and by 0.1 percentage point from 1988–94 to 1995–8. This small increase in the share of GDP at constant prices substantiates the point made earlier that the traded sector growth had little to do with the growth in the manufacturing sector. As argued, the manufacturing sector never really had the

Philomen Harrison 207 Table 9.6 Industry contribution to GDP (in %; period averages, in current prices) Industry

Period 1966–73 1974–80 1981–87 1988–94 1995–98

Agriculture Petroleum Manufacturing, of which: – Food processing – Textiles – Printing – Wood – Chemicals – Assembly – Miscellaneous Traded Non-traded

5.6 25.0 10.2 4.5 0.8 0.7 0.5 1.3 2.1 0.4 15.7 59.2

3.6 41.0 7.0 2.5 0.6 0.5 0.5 0.9 1.7 0.3 10.6 48.3

2.2 26.9 7.1 2.9 0.5 0.6 0.3 1.0 1.6 0.2 9.3 63.8

2.4 26.3 8.9 4.2 0.3 0.7 0.2 1.3 1.8 0.4 11.3 61.1

2.2 26.6 7.8 3.2 0.2 0.8 0.3 1.3 1.7 0.3 9.9 63.5

Source: Central Statistical Office, Republic of Trinidad & Tobago, National Income Reports, 1966–85, 1981–91, 1990–94.

dynamism that should have resulted from development strategies and plans, leaving the economy still heavily dependent on a staple for export earnings and government revenues (St Cyr, 1981). While the adjustment policies should in principle increase investment, the performance above suggests that these activities have not contributed consistently or significantly to economic growth. Low or negative growth rates for some manufacturing industries have occurred. The decline or disappearance of some activities suggests that there is differential impact of structural adjustment by industry. The energy sector continues to play a major role in the economy. The appearances of fiscal and current account deficits in the most recent period of the data (1995–8) is cause for concern relative to the recovery of private investment and the sustainability of the growth in real GDP.

Changes in key structural factors at the micro-level An overview of industry differences This section explores differences across industries of key features in the cost and asset structures of firms. Features contributing to differences on an industry basis include export orientation/market focus, capital/labour intensity, and dependence on imported raw materials.

208 Manufacturing under Adjustment: Trinidad & Tobago

The institutional bias in lending by commercial banks against small/medium firms is a feature that cuts across industry contributing to differences within industries. The issue of differential impact of adjustment is intricately connected to the ability of firms to access credit and related issues of the acquisition of technology and accessing export markets. The inward orientation of the industrialization thrust and the high dependency on imported raw materials can lead to differences in the impact of adjustment. Thus fundamental to the understanding of the dynamics of adjustment is the distinction based on industrial activity. Leverage use Tables 9.7–9.9 show the trend over time in the use of leverage (total debt to total assets) in the food, textiles and assembly industries. For the period 1983–7, the assembly activity increased its use of leverage from 58 per cent of its asset base in 1983 to 72 per cent by 1987. Textiles initially decreased its use of debt from 61 per cent in 1983 to 55 per cent in 1984, increasing to 77 per cent in 1987. Food processing firms exhibited slight increase in use of leverage from 52 per cent in 1983 to 53 per cent in 1984 which was followed by a marginal fall to

Table 9.7 Selected indicators (medians, in %): food processing/drink/tobacco industry (by year) Year

Leverage

Raw materials

Interest Profit Investexpenses to ment to sales total assets

Output to Employment

Average wage

1983 1984 1986 1987 1988 1989 1990 1991 1992 1993 1994 All years

52.0 52.8 49.4 51.2 53.8 61.6 56.8 53.8 56.2 45.6 51.6 52.2

45.5 44.5 43.1 43.3 43.3 46.8 44.1 49.7 53.3 45.5 50.8 45.3

1.3 1.6 2.3 1.9 1.3 1.9 1.5 1.2 1.9 2.3 2.4 1.7

12.0 17.3 16.1 15.6 14.2 12.8 14.6 17.6 13.0 11.6 21.2 14.5

1.7 2.0 2.2 2.2 1.8 1.6 1.6 1.6 1.9 1.4 2.3 1.9

3.8 1.0 1.0 0.0 1.5 1.2 0.9 3.7 1.7 2.8 1.9 1.5

7.9 4.0 3.9 3.5 2.5 2.8 3.4 2.6 3.6 3.3 2.8 3.5

Sources: Elaborated by author on the basis of own survey and data from Central Statistical Office, Annual Sample Survey of Establishments.

Philomen Harrison 209 Table 9.8 Selected indicators (medians, in %): textiles, garments and related industry (by year) Year

Leverage Raw Interest Profit Investmaterials expenses to ment to sales total assets

Output to Employment

1983 1984 1986 1987 1988 1989 1990 1991 1992 1993 1994 All years

61.2 53.0 74.1 76.7 57.4 54.1 65.0 59.9 86.0 61.3 58.1 62.0

4.6 4.2 4.7 5.3 5.4 4.1 4.5 4.7 5.3 3.9 3.7 4.6

43.5 39.5 44.0 49.4 50.9 45.1 50.2 49.0 55.2 52.8 47.1 47.8

3.0 3.6 5.8 4.1 3.9 3.6 4.4 4.9 5.4 2.4 4.3 4.2

1.4 0.5 0.3 2.6 1.7 3.5 1.3 2.1 1.6 2.0 0.4 1.4

3.0 4.0 2.7 4.1 1.4 3.9 1.9 3.2 3.4 2.7 1.1 3.1

Average wage

1.3 1.3 1.3 1.1 1.1 0.9 0.9 1.0 1.0 0.7 0.8 1.0

Source: Elaborated by author on the basis of Central Statistical Office, Annual Sample Survey of Establishments.

Table 9.9 Selected indicators (medians, in %): assembly and related industry (by year) Year

Leverage Raw Interest Profit Investmaterials expenses to ment to sales total assets

Output Average to wage Employment

1983 1984 1986 1987 1988 1989 1990 1991 1992 1993 1994 All years

57.9 65.1 69.6 72.2 67.2 71.7 64.1 69.6 64.1 66.8 73.4 66.9

9.1 11.3 10.2 8.9 9.4 11.3 9.0 10.9 8.3 10.5 8.5 9.4

41.9 38.7 51.0 38.1 48.9 50.9 59.6 54.1 52.3 47.1 53.5 47.9

2.9 3.7 3.3 3.7 4.1 3.3 2.7 3.2 4.5 3.6 4.0 3.5

2.5 0.1 0.0 0.1 0.3 0.4 0.2 1.2 0.9 0.6 0.0 0.6

5.6 4.7 1.9 3.7 1.2 1.6 2.5 2.8 3.7 2.1 2.1 2.6

2.2 2.2 2.2 1.8 2.1 1.7 1.5 1.5 1.3 1.4 1.3 1.6

Source: Elaborated by author on the basis of Central Statistical Office, Annual Sample Survey of Establishments.

210 Manufacturing under Adjustment: Trinidad & Tobago Table 9.10 Real lending rate (RLEND, in %), real exchange rate index (RER) and changes in the RER (CHRER) 1983–94 Year

RER

CHRER

RLEND

1984 1986 1987 1988 1989 1990 1991 1992 1993 1994

106.0 134.0 132.0 128.2 133.8 124.7 120.3 113.6 131.2 135.2

0.096 0.264 0.015 0.029 0.044 0.068 0.035 0.056 0.155 0.030

3.5 0.5 5.5 1.0 4.0 0.6 0.7 7.9 6.3 2.3

Source: Own elaboration based on various statistical reports of the Central Statistical Office, Trinidad & Tobago.

49 per cent in 1986. The use of leverage by the food processing industry appeared to be moderate with the exception of 1989 when the ratio of debt to assets was almost 62 per cent. For the remaining years the textile/garments industry showed more pronounced fluctuations in its use of leverage than the other industries. Leverage use in 1988–9 for the textile/garments industry was under 60 per cent but 1992 saw the highest ratio of all the industries and years at 86 per cent which followed the implementation of adjustment in 1988. Use of leverage for the period beyond 1987 in the assembly industry was consistently higher than the other two industries with high points in leverage use of 72 per cent in 1992 and 73 per cent in 1994. Interest expenses All three activities showed increases in the ratio of interest expenses to operating expenses consistent with increasing real lending rate (RLEND) to positive values in 1983 to 1986 (Tables 9.7–9.10). There was a sharper increase in the case of textiles between 1983 and 1986 from 3 per cent to 6 per cent which culminated in the high indebtedness mentioned above. Interest expenses ratios were more consistent in food processing and assembly with the ratios to total expenses being lower in food processing (1.2 per cent to 2.4 per cent) than assembly (2.4 per cent to 4.5 per cent).

Philomen Harrison 211

The trends that can be pinpointed are: (i) Lower ratios of interest expenses to total expenses in food processing as compared to textiles/garments and assembly/related; (ii) high real lending rates imply high interest expenses in assembly/related and textiles garments but may imply lower interest expenses ratio in food processing. The food processing industry seemed able to reduce its borrowing with increasing interest rates or more favourable rates for firms in this industry. Raw material costs Changes in raw material costs (raw material purchases to total expenses) were present in all three industries. In food processing this ratio fell from 45.5 per cent of total expenses in 1983 to 43 per cent in 1988 consistent with economic contraction through quantity adjustments. There was no change in this ratio from 1987 to 1988, a devaluation year. In 1989 the raw materials ratio increased to 47 per cent in food processing and fluctuated for the remaining years with a decrease in this ratio to 45.5 per cent in 1993 devaluation year (Tables 9.7–9.10). In the textile industry this ratio increased in 1988 following the devaluation, from 49 per cent in 1987 to 51 per cent in 1988. Quantity adjustments saw a decreasing ratio in textiles/garments from 55 per cent in 1992 to 53 per cent in 1993. In the assembly sector for the devaluation year 1988, raw material expenses increased from 38 per cent in 1987 to 49 per cent in 1988 while the 1993 devaluation was accompanied by a decline in this percentage from 52 per cent in 1992 to 47 per cent in 1993. For the smaller percentage devaluation at the start of adjustment, there was a different response of this ratio in food (no change) to textiles/assembly (increase). However, for the larger percentage devaluation in 1993 there was reduction in this ratio for all three industries which may suggest reduced quantity purchased. Apart from quantity adjustments, another response may have been the purchasing of cheaper/inferior sources of raw materials or greater reliance on local materials. Profitability Profitability (net profit after tax to total sales) declined in general for all three activities in the pre-adjustment period. The food-processing industry showed declining profitability up to 1987 while the adjustment period from 1988 saw fluctuating profitability. Profitability in 1991 increased close to the rate of 1983 and tended to show increases

212 Manufacturing under Adjustment: Trinidad & Tobago

in 1993. Associated with this trend in this industry was the relationship between profitability and the real lending rate of interest, which exhibited an inverse association for the periods 1986–9 and 1991–3 (Tables 9.7–9.10). Special government policy that restricted imports of garments in 1986–7 affected the textile industry. Interestingly this industry showed reasonable profitability despite the negative growth reported at the macro-level. In general, profitability and RLEND in this industry tended to move in the same direction for the years 1984–90. One reason for this performance might have been reduction of expenses such as wage suppression and use of cheaper or inferior raw materials. The assembly industry showed declining profitability for most years, the most dismal ratios of the three industries. There was an inverse relationship between profitability and RLEND for the periods 1984–90 and 1991–2. This industry, as discussed above, was a consistently high user of leverage, and is also a very high importer of raw materials for production. The burden of these costs and the ensuing indebtedness therefore spilled over to have a damaging effect on profitability. Investment Food (1983–8) and assembly (1983–6) showed declining investment (total capital expenditure to total assets) for these periods. Textiles, which was at a lower rate of investment in 1983 as compared to the other activities, initially showed an increase in 1984, but this rate was still lower than that for the other two industries. For the remaining years investment in all three sectors fluctuated, declining for all three activities in 1993 and 1994, which followed a devaluation in 1993 and the start of tariff reduction policies. This micro-level picture suggests the lack of sustainable recovery of private investment throughout the period of the data (Tables 9.7–9.9). Productivity and wages Productivity (output to employment – Tables 9.7–9.9) was at a consistently higher value in the food processing industry almost throughout the data set as compared to the other activities, which explains the better performance of this activity over the other two activities. Textiles in turn had lower output to employment ratios than the other two industries, reflecting some industry differences. The decline in output to employment in food processing for the period 1984–9 was due mainly to falling output (1984–9) and also to declining employment, suggesting

Philomen Harrison 213

perhaps increased capital intensity and/or under-capacity utilization. There is no clear indication that adjustment led to increased productivity in these industries. The varying of the average wage was a mechanism by which firms responded to adjustment to offset the effects of relative price increases due to the devaluation. There was evidence of declining average wages or no changes for some years. This situation was more pronounced in the textile/garments and assembly/related industries than in food processing. There were therefore some differences in the use of this mechanism by these three industries, as a mechanism for survival or as a means of remaining competitive with others, with the textile industry apparently using this mechanism the most to offset the macroeconomic changes such as the devaluation to remain profitable. Changes in investment and its profitability by size and industry This section explores differences that may arise from firm size (based on employment – less than 50, and 50 or more, employment size) across the three industries. The relevance of the distinction by firm size was referred to earlier. What is obvious are the lower rates of profitability and investment for the smaller firms as compared to the larger firms. However there are exceptional years (see Table 9.11). For the larger firms (50employment), profitability in the food processing industry fell from a relatively high level in 1983 (3.8 per cent), but it remained positive or zero. In assembly, the fall in profitability culminated in losses of 3.9 per cent in 1987 and of 0.2 per cent in 1988. In 1987 there was economic contraction and 1988 was a devaluation year, but it seems that profitability in this industry never recovered throughout the period of adjustment. In textiles, profitability among the larger firms was lower than in the other industries and also fell from 1983, becoming negative in 1986 with 2.3 per cent. For the smaller firms (less than 50 employment) there was a distinctly different movement. Profitability was lower at the outset in 1983, but there was less contraction. In food processing, there were gains from 1991 culminating in a peak in 1993 when the currency was devalued and floated. In textiles and assembly the smaller firms outperformed the larger firms in some years. This result is interesting in so far that it indicates that large firms may suffer more than smaller firms. This implies that size of firm may turn out to be a disadvantage rather than an advantage under adjustment in this industry. Table 9.11 shows investment by size of firm for each industry. In the food processing industry there was a similar pattern of investment

214 Table 9.11 Profit to sales (%) and investment to total assets (%) by employment size and industry (medians) Food processing :50 1983 1984 1986 1987 1988 1989 1990 1991 1992 1993 1994

0.1 0.7 0.0 0.1 0.0 0.3 0.0 0.8 0.6 3.7 0.0

Profit 950 3.8 1.4 1.4 0.3 1.5 0.7 0.1 2.2 0.0 0.0 0.5

Textiles and garments

Investment :50 950 4.1 2.6 0.1 1.3 0.9 0.6 1.2 0.1 0.1 0.1 0.9

6.7 5.1 4.1 3.8 2.4 2.8 2.6 2.0 4.1 2.1 4.0

Profit :50 950 0.0 0.0 0.5 0.3 0.0 3.3 1.5 0.4 0.9 0.0 0.0

0.8 0.6 2.3 1.9 0.9 0.6 0.0 1.1 0.0 0.0 0.0

Assembly and related

Investment :50 950

Profit :50 950

1.0 1.8 0.2 0.9 0.0 0.4 0.3 0.1 1.6 1.3 1.1

0.7 0.5 0.0 0.0 0.0 0.0 0.0 0.9 0.0 0.0 8.8

1.5 3.3 2.2 2.8 1.3 0.4 1.7 3.8 1.9 1.3 1.3

2.4 0.2 0.0 3.9 0.2 0.0 0.0 1.1 0.0 0.0 0.0

Source: Elaborated by author on the basis of Central Statistical Office, Annual Sample Survey of Establishments.

Investment :50 950 1.6 3.3 1.7 2.0 0.6 0.2 0.4 0.9 1.0 0.5 0.2

5.8 4.5 1.5 1.7 2.6 1.6 2.0 2.2 1.9 0.7 1.1

Philomen Harrison 215

decline in both size groups. Investment for the larger firms fell from a higher rate and the fall was prolonged (to 1988) with the period of decline for the smaller firms being 1986. In 1987, investment increased slightly for the smaller firms and there appeared to be little or no movement in investment of these smaller firms for the period of adjustment up to 1990, the overriding pattern suggesting a decreasing trend for this period. In general, the ratio of investment was higher for the larger firms than for the smaller firms in this industry. One point of difference between the textile and food processing investment rate is that investment for the former was at a lower rate. The pattern of investment in this industry was similar for both groups of firms in the pre-adjustment period 1983–8 and also 1992–4. There was declining investment rate for the smaller firms while investment rate for the larger firms increased. This increase was however not sustainable since it resulted in a severe decline from 1992 to 1994. In the assembly industry, the investment rate for the larger firms fell from a very high rate in 1983 through to 1984 and 1986 after which there was some fluctuation for the remaining period. From 1989 to 1991 there was mild recovery of investment. The 1992 to 1994 period saw a decline in investment, with the lowest point in 1993 – the year of the devaluation and the floating of the exchange rate. For the smaller firms, investment was already at a lower rate, fluctuating for some of the pre-adjustment years, which suggests instability with regard to this variable. From the start of adjustment there was a definite declining trend in investment from 1988 to 1990 with minor increase occurring from 1991 to 1993 followed by declining investment for the remaining period of adjustment.

Conclusions The central question of this chapter was to investigate the impact of adjustment on private investment. The approach first looked at the context of the development thrust, which was followed by a review of the relative prices and macroeconomic outcomes. Exploration of the microeconomic performance of selected manufacturing industries and specific variables sought to explain why some of the expectations of adjustment were not realized. The macro-level data showed lower ratios of investment to GDP in the early adjustment period 1988–94. The growth rates for the manufacturing industries showed up differences in performances with some recovery of the food processing industry along with declining growth in textiles and assembly.

216 Manufacturing under Adjustment: Trinidad & Tobago

Declining profitability and investment in the pre-adjustment period, a lack of sustainable recovery of both these variables, differences in the use of the average wage as a factor in response to devaluation of the exchange rate, and varying levels of indebtedness are apparent from the analysis of the firm-level data. While these features are common in all three sectors there are differences relative to the effects/uses. For example, at the micro level, the assembly sector seemed to be the hardest hit with regard to the lack of recovery of profitability, and this was related to its higher percentage input of raw materials and its domestic demand focus as compared to food processing which is more exportoriented. The structure of the assembly industry has been changed by adjustment, with the closing down of the activity of new motor vehicles assembly and consumer durables and with these activities becoming non-traded. In addition the use of leverage has also led to a situation of indebtedness in this industry. Hence the micro story suggests that both exchange rate devaluation and financial liberalization have affected the assembly industry in a more adverse way compared to food processing and textiles, with larger firms suffering more adversely with regard to profitability in some years. Productivity and the tendency towards producing for exports have been the main strengths in the food processing industry. While the food processing also has imported raw materials at a high level, the distinction is the export market penetration of a few key firms that contributed to the difference in performance of this sector. The textile industry was the most threatened by imports, as reflected in the large negative growth rates at the macro level. The reason was the flooding of imported garments into the economy by travellers before and after trade liberalization with cheaper goods from China, Taiwan, etc. Productivity increases did not seem to materialize in this activity which might have enabled greater outward orientation. The textile industry though showing the most negative growth at the macro level showed signs of a reasonable degree of profitability at the micro level, which was attributed to wage suppression. With regard to size differences, the access to credit might have led to more adverse consequences for some large firms with regard to profitability. Smaller firms were less profitable than their larger counterparts in food processing and assembly but surprisingly almost out-performed the large firms for some years in the textile industry. Investment of small firms was generally lower across all industries. Returning to the main question on the impact on investment, the fluctuating pattern in investment at the micro level and the lower investment

Philomen Harrison 217

rate in the period of adjustment do not imply sustainable recovery of this variable. The positive growth in private investment in the recent period 1995–8 relies on the energy-based sector with the construction of major plants in petrochemicals and natural gas refining and does not imply marked recovery of non-oil manufacturing investment. What this chapter has shown is that in looking underneath the surface at the micro level in attempting to analyze the impact of adjustment the story is a very complex one with regard to what happens to the private sector and firm under adjustment. The fundamental issues, however, are not the physical distinction of industry and size but issues related to the access and cost of credit, use of leverage, access to export markets, structure of production and raw materials purchases. These aspects can lead to unexpected results of macroeconomic price incentives meant to stimulate investment and growth.

Notes 1. See Corbo, Fischer and Webb (1992); Thomas et al. (1991); Serven and Solimano (1992); Benjamin (1992); Bleaney and Fielding (1995) for studies on investment response under adjustment. 2. The backdrop to this chapter is a Ph.D. thesis that looks at the firm under adjustment in analyzing the impact of structural adjustment policies. The choice of these three sectors is related to the confines of the workload of the thesis. 3. While early work with regard to the role of finance in development can be found in Schumpeter (1934), the work of McKinnon (1973) and Shaw (1973) underlie this approach. 4. See Thomas et al. (1991) for a review of financial liberalization. 5. See also Kaldor (1983). 6. This is in line with the view of Taylor (1987, 1990), who points to the Polak model – the analytical basis for the devaluations prescribed by the IMF – as a ‘theoretically incomplete description of the economy’. 7. Diversification in the Third Five Year Plan (1969–73) was to be achieved through the promotion of livestock and fishing production in agriculture, increased production of cocoa, citrus, sugar and other crops and through the development of manufactured exports to serve regional and international markets. 8. These would include the entire public sector, i.e. civil service, local government, state enterprises, daily paid and special government project workers. 9. Information was taken from official sources such as: Republic of Trinidad & Tobago, The Imperatives of Adjustment: Draft Development Plan 1983–1986, Medium-Term Policy Framework Documents (1993–95) and 1994–96); and Draft Medium Term Macro Planning Framework (1989–95), Government of Trinidad & Tobago, Review of the Economy, several years; World Bank Report No. 10417TR (1992).

218 Manufacturing under Adjustment: Trinidad & Tobago 10. The traded sector includes import competing and exporting sectors. While it is defined to include the manufacturing and agriculture sectors, the presence of prohibitive tariffs implies that in a strict sense the manufacturing sectors or parts should be treated as non-tradable.

References Benjamin, Nancy (1992) ‘What Happens To Investment Under Adjustment: Results From a Simulation Model’, World Development, vol. 20. Bleaney, Michael and David Fielding (1995) ‘Investment, Trade Liberalization and Structural Adjustment’, Journal of Development Studies, vol. 32. Corbo, Vittorio, Stanley Fischer and Steven B. Webb (eds) (1992) Adjustment Lending Revisited – Policies to Restore Growth, Washington, DC: The World Bank. FitzGerald, E. V. K. (1993) The Macroeconomics of Development Finance: A Kaleckian Analysis of the Semi-Industrialized Economy, New York: St Martin’s Press. Government of Trinidad and Tobago (1958) Five Year Plan, 1958–1962, Port of Spain. Government of Trinidad and Tobago (1964) Five Year Plan, 1964–1968, Port of Spain. Government of Trinidad and Tobago (1969) Five Year Plan, 1969–1973, Port of Spain. Government of Trinidad and Tobago, Budget Speeches, several years. Government of Trinidad and Tobago, Review of the Economy, several years. Harrison, Philomen (1994) ‘The Impact of Oil on Trinidad and Tobago 1966–1973’, Working Paper No. 171, The Hague: Institute of Social Studies. Harrison, Philomen (1999) ‘The Firm Under Adjustment: A Micro-level Interpretation of Macroeconomic Policies in Trinidad and Tobago, 1983–94’, unpublished Ph.D. thesis, The Hague, The Netherlands: Institute of Social Studies. IMF, International Financial Statistics, several years. Kaldor, Nicholas (1983) ‘Devaluation and Adjustment in Developing Countries’, Finance and Development, vol. 20, no. 3: 35–47, Washington, DC: IMF. Killick, Tony (ed.) (1984) The Quest for Economic Stabilization: The IMF and the Third World, London: Gower. Krugman, Paul and Lance Taylor (1978) ‘Contractionary Effects of a Devaluation’, Journal of International Economics, vol. 8. Lewis, W. Arthur (1950) ‘The Industrialisation of the British West Indies’, Caribbean Economic Review, vol. 2. McKinnon, Ronald I. (1973) Money and Capital in Economic Development, Washington, DC: The Brookings Institution. Republic of Trinidad and Tobago (1983) The Imperatives of Adjustment, Draft Development Plan 1983–1986, Report of the Task Force appointed by Cabinet to formulate a multi-sectoral development plan for the Republic of Trinidad and Tobago. Republic of Trinidad and Tobago (1992) Medium Term Policy Framework: From Stabilization to Growth 1993–1995, Port of Spain, November. Republic of Trinidad and Tobago (1993) Medium Term Policy Framework, 1994–1996, Port of Spain, November.

Philomen Harrison 219 Republic of Trinidad and Tobago, National Planning Commission (1988) Restructuring for Economic Independence: Draft Medium Term Macro Planning Framework, Port of Spain, July. Republic of Trinidad and Tobago, Central Statistical Office, The National Income of Trinidad and Tobago, several years. Republic of Trinidad and Tobago, Central Statistical Office, Annual Statistical Digests, several years. Schumpeter, J. (1934) The Theory of Economic Development, Cambridge, Mass.: Harvard University Press. Serven, Luis and Andrés Solimano (1992) ‘Private Investment and Macroeconomic Adjustment: A Survey’, The World Bank Research Observer, vol. 7. Serven, Luis and Andrés Solimano (1993) Striving for Growth After Adjustment: The Role of Capital Formation, Washington, DC: The World Bank. Shaw E. S. (1973) Financial Deepening in Economic Development, London: OUP. St Cyr, Eric (1981) ‘Industrial Development Strategies in the Caribbean Countries: The Case of Trinidad and Tobago, St. Augustine, Trinidad and Tobago’, mimeo, The University of the West Indies. Stiglitz, Joseph E. and Andrew Weiss (1981) ‘Credit Rationing in Markets with Imperfect Information’, American Economic Review, vol. 71. Taylor, Lance (1983) Structuralist Macroeconomics: Applicable Models for the Third World, New York: Basic Books Inc. Taylor, Lance (1987) ‘IMF Conditionality: Incomplete Theory Policy Malpractice’, in Robert J. Myers (ed.), The Political Morality of the International Monetary Fund, New Brunswick: Transaction Books. Taylor, Lance (ed.) (1990) Socially Relevant Policy Analysis: Structuralist Computable General Equilibrium Models for the Developing World, Cambridge, Mass: MIT Press. Thomas, Vinod, Ajay Chibber, Mansoor Dailami and Jaime de Melo (1991) Restructuring Economies in Distress: Policy Reform and the World Bank, Oxford: OUP for the World Bank. World Bank (1992) Trinidad and Tobago Policy Agenda for Sustained Development, Report No. 10417-TR, Country Department III, Latin America and the Caribbean Region, Washington, June. World Bank, World Debt Tables, several years.

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Index absolute exclusion 95 ACP status 69 adjustment 9, 114–39 crisis and 9, 114–15, 117–19 and the environment 141, 146–9 impact on gender equality 125–32, 135–6 Trinidad & Tobago 192–219; adjustment policy measures 194–6, 197, 200–1; industrialization in adjustment period 199–201 see also stabilization affluent sector 94 agrarian dualism 144–5 agricultural extension 151–2 agriculture 5–6 employment in and exclusion 99–103, 104, 105, 106 and the environment 142–6, 151–2, 156–7; macroeconomic policies 147–9; policy effectiveness 152–5 Haiti 162–5, 185; reform 166–9 modern agricultural sector 102–3, 104, 105 subsistence agriculture 103, 105 agro-exports 5–6, 60–1, 91–2, 142, 145–6 non-traditional 70, 168–9 Aguilar, J. 68 Aguilar, R. 68 AIDS 178 Akyüz, Y. 46 Alliance for Progress Program 60 Aristide, J.-B. 178–9, 187 artisans 176, 177 Ascher, W. 140 Aslanbegui, N. 130 assembly industries 102, 193 Haiti 171–4, 185 Trinidad & Tobago 208–15, 216

Bahamas exchange rate 65 tariff reforms 67 trade performance 72 bananas 148 banking 9, 30–56, 90 development in Central America 30, 31–3 financial liberalization 33–4 interest rates 39–44 investment 47–50 offshore 33, 62 savings and 45–7 structure in the 1990s 34–9 see also financial sector banking supervision 34 Barbados exchange rate 65 tariff reforms 67, 68 trade performance 72 bauxite-alumina production 78 biocide taxation/use 152–4 bio-economic modelling 152–4 Blaikie, P. 6, 7 Bolles, A.L. 116 Borrell, B. 69 borrowing 14–15 budget constraint 14–16 Buiter, W. 15 Bulmer-Thomas, V. 60, 80, 81, 142 Burgess, R. 20 Bustelo, E. 88, 89, 96, 104, 105–6 Buttari, J.J. 119 Camacho, E. 43 capital account liberalization 59 capital inflows 44, 60, 83 capital-intensive agriculture 155 Cárcamo, J.A. 151 Caribbean Basin Initiative (CBI) 69, 83 Caribbean Common Market (CARICOM) 69, 80–2 221

222 Index Caribbean Free Trade Area (CARIFTA) 198 cars 184–5 Catholic Church 133 CATs (Certificados de Abono Tributario) scheme 73, 75 Central America and the Caribbean (CAC) agricultural production and exports 5–6 common characteristics 1–2 diversity 1 growth 2–3 indicators of economic well-being 3–5 Central American Common Market (CACM) 60, 80–2 central banks 31, 34 cereals 147 charcoal 163 Chocano, L.A. 82 citizenship 88–113 poverty and exclusion 95–9 Cline, W.R. 60 coffee 31, 148, 162–3, 168 combined method to measure poverty 96–7 commercial sector 89–90, 92 credit 48–9, 51–2 Common External Tariff (CET) 60, 80, 200 competition between banks 43 concentration of wealth 107 conscription 100 consumption 152–4 contraceptive use 119–21, 132–3, 134–5 Costa Rica banking 32, 33, 35–6, 37, 90 citizenship and social integration 88–113 passim debt 25 exchange rate 64, 66 financial liberalization 33–4 fiscal sustainability 22 gender equality 135–6 macroeconomic indicators 18 tariff reforms 67–8 trade performance 71, 72, 73–5

cotton 148 credit/loans 91, 180 bank loans to related companies 43–4 rationing 195 use of by sector 48–50, 51–2 Creole 182 crisis, and adjustment 9, 114–15, 117–19 crop mix 162–3, 164, 168–9 Cuba 119, 136 culture 115–16 current account balance 18, 19 Trinidad & Tobago 205, 206 Danby, C. 42 Danielson, A. 24 debt, external 8, 13, 14–15 and development finance 17–26 debt ratios 15, 17, 21–3 Trinidad & Tobago 205, 206 Deere, C.D. 116 deforestation 142, 143 degradation of natural resources 142–6 Del Cid, R. 94 democracy 6–7 deposit rates 39–40, 41 devaluation 16, 196 see also exchange rate development finance and external debt 17–26 separate economic and social development policies 109 strategy 3–6 development banks 31, 34, 49–50 Dierckxsens, W. 130 Dijkstra, A.G. 58, 73, 119 disintermediation 33 Dominican Republic debt 26 exchange rate 65, 66 fiscal sustainability 23 macroeconomic indicators 19 pepper-growing project 169 tariff reforms 67, 69 tourism 180 trade performance 72 dualism, agrarian 144–5

Index Duncan, R.C. 69 Durham, W.H. 144 Duvalier, J.-C. 178, 186–7 Easterly, W. 26–7 Echeverria, C.M. 82 Eckstein, S. 119 economic activity rate, relative 123–4, 125, 129–30 economic assets 115 female access to 123–5, 126, 127, 129–32 economic groups 32, 35, 38–9, 50, 90 economic reforms 88 and sustainability 7–8; fiscal sustainability 12–13, 15–17, 23–4, 26–7 see also adjustment; stabilization economic sustainability 7 education 4 female 122, 123, 126, 128–9 Haiti 174, 181–3, 186 Edwards, S. 58, 59 El Salvador banking 32–3, 35, 37, 38–9 debt 25 exchange rate 64, 67 fiscal sustainability 22 interest rates 40–2 macroeconomic indicators 18 tariff reforms 67, 68 trade performance 72 electricity supply 183–4 Elson, D. 114, 126, 127 employment Haiti 172 social integration, exclusion and 89, 94, 99–109 women and 116, 123–5, 126, 127, 129–32 Enríquez, L. 32 enrolment, school 122, 123, 128–9, 135 environment 9–10, 140–60 effectiveness of policy instruments 152–5 environmental policies 149–52 macroeconomic policies 146–9 natural resource degradation 142–6

223

environmental sustainability 7 erosion 143, 162–5 Evans, T. 100, 128 exchange rate 16 adjustment and agro-export 147 trade liberalization measures 58, 63–7 Trinidad & Tobago 63, 65; policy 196, 197; real exchange rate 201–2 exclusion 88–9, 95–109 employment and 99–103 poverty and 95–9 export assembly industries see assembly industries Export Contract 92–3 Export Development Company (EDC) 199, 201 export processing zones 70, 73, 74, 174–5 exports 71, 72, 82, 91–2, 127 agricultural 5–6, 60–1, 91–2, 142, 145–6; non-traditional 70, 168–9 Costa Rica 73–4 Guatemala 76–7 Jamaica 77–8, 79 external debt see debt, external Farber, S. 152 farm size 169 female representation in parliament 121–2, 133–4, 135 fertility 119–21, 132–3 fertilizers price subsidies 152–3, 156 use 152–4 financial liberalization 9, 30–56 interest rates 30–1, 39–44, 51, 195 investment 30, 31, 47–50, 51, 194–5, 197 policies 33–4 savings 30, 31, 45–7, 51 see also banking financial repression 201 financial sector 89–90, 92 financieras 33 firm size 195, 213–15, 216 fiscal deficit 205, 206

224 Index fiscal incentives 92–3 fiscal sustainability 8, 12–29 debt and development finance in CAC region 17–26 limits to fiscal policies 14–17 Fischer, S. 26–7 FitzGerald, E.V.K. 58, 196 FLACSO (Facultad Latinoamericana de Ciencias Sociales) 96 food crops 162–3 see also crop mix food processing industry 208–15, 216 forced contraceptive use 120 foreign aid 21, 22, 23, 24, 119 foreign capital flows 44, 60, 83 foreign exchange (forex) market reforms 58, 63–7 forest conservation 154 Franco, E. 67, 93 free zones 70, 73, 74, 174–5 freedom 6–7 frontier migration 144 Funkhouser, E. 102, 131 Galbis, V. 39 Gavin, M. 45 GDP growth 2, 3, 17, 18, 19; trade reform 71, 72; Trinidad & Tobago 203–4 industry contribution to in Trinidad & Tobago 205–7 per capita 18, 19, 117, 118 gender equality 9, 114–39 in CAC 119–25 changes over time 132–4 impact of adjustment 125–32, 135–6 Ghysels, J. 90 Gibson, B. 151 Gini index 4 González, C. 43 Goodman, D. 140 gourmet coffee scheme 168 growth 117–19 GDP 2, 3, 17, 18, 19; trade reform 71, 72; Trinidad & Tobago 203–4 volatility 2–3

Guatemala 1 banking 33, 36, 37 debt 25 exchange rate 64, 66 fiscal sustainability 22 gender equality 122–3, 135 macroeconomic indicators 18 tariff reforms 67, 68 trade performance 71, 72, 75–7 Gurdián, R. 44 Haiti 10, 161–91 agricultural reform 166–9 debt 26 exchange rate 65, 66 fiscal sustainability 23 gender equality 122, 123, 133, 135 handicrafts 175–7 industrial recovery 172–5 key inputs 181–5; education 174, 181–3, 186; infrastructure 175, 179, 180, 183–5, 186 macroeconomic indicators 19 manufacturing 170–5; assembly industries 171–2, 185; import substitution 170–1 migration 165–6 population growth, erosion and poverty 162–5 problems with the informal economy 180–1, 186 tariff reforms 67, 68–9 tourism 178–80, 186 trade performance 72 handicrafts 175–7, 186 Harrigan, J. 24 Harrison, P. 199 Hausmann, R. 45 health 4 female 123, 124, 126, 128, 135 Heerink, N. 155 highly indebted poor countries (HIPCs) 26 hillside area 142, 143 Honduras banking 33, 36, 37, 38 citizenship and social integration 88–113 passim debt 25

Index Honduras – continued exchange rate 64, 66 fiscal sustainability 22 macroeconomic indicators 18 tariff reforms 67, 68 trade performance 72 household income 130 Hubbard, A. 140 Hughes, W. 36 Human Development Index (HDI) 1 illiteracy 181, 182 import substitution 60, 170–1 imports 71, 72, 74, 78, 82, 174 incentives, fiscal 92–3 inclusion 88–9, 95–109 income distribution 94–5 household 130 inequality and gender inequality 122–3 per capita 1, 4 poverty measurement 97, 107–8 Industrial Development Corporation (IDC) 198, 201 industrial sector see manufacturing industrialization by invitation 61, 71, 74 Trinidad & Tobago 196–201 inertial poor 96–7 see also vulnerability inflation 15–16, 18, 19, 26–7, 202–3 informal sector employment and exclusion 102, 103, 105 problems in Haiti 180–1, 186 women in 126, 130–1 infrastructure 175, 179, 180, 183–5, 186 input intensity 151, 155, 157, 162–3, 168–9 institutional deficiencies 145, 149 institutional policies 150 Instituto Nacional para la Reforma Agrarie (INRA) 167 Inter-American Development Bank 33 Inter-American Institute for Agricultural Cooperation (IICA) 149–50, 168

225

interest expenses 208, 209, 210–11 interest-rate spreads 42–3 interest rates 21, 22, 23 deposit rates 39–40, 41 financial liberalization 30–1, 39–44, 51, 195 lending rates 40, 41, 210–11, 212 and saving 45, 47, 51 Trinidad & Tobago 201, 202–3, 210–11, 212 International Institute for Environment and Development (IIED) 143 International Monetary Fund (IMF) 12, 17, 24, 33, 61, 192, 193 intra-regional trade 69–70, 80–2 investment financial liberalization 30, 31, 47–50, 51, 194–5, 197 gross 17–19 impact of adjustment on private investment in Trinidad & Tobago 10, 192–219 public 204–5 Jamaica debt 26, 79 exchange rate 63, 65 fiscal sustainability 23 macroeconomic indicators 19 tariff reforms 67, 69 trade performance 71, 72, 77–9 Jepma, C.J. 58 Katz, E.G. 130 Key-Sung Cho 76 Killick, T. 196 Krugman, P. 196 Kruijt, D. 94 Kuyvenhoven, A. 153 labour-intensive agriculture 151, 155, 157 labour-intensive crops 162–3, 168–9 labour legislation 109 labour market female participation 116, 123–5, 126, 127, 129–32 off-farm labour market 157

226 Index labour market – continued social integration, exclusion and 89, 94, 99–109 labour mobility 81 land-intensive crops 162–3 land tenure 145, 166–7 land use 144–5, 152–5 landholdings, size of 169 Latin America 24, 25, 26 lending rates 40, 41, 210–11, 212 Leonard, H.J. 143 leverage use 208–10 Lewis, W.A. 6, 198 life expectancy 122, 123, 128, 135 liquidity ratio 45–6 Little, I. 58 loans see credit/loans Lomé Convention 69, 79, 80 long-term finance 50 López-Perreira, M. 145, 147, 151 Lutz, E. 146, 151 macroeconomic indicators 17–19, 118 macroeconomic policies Haiti 186–7 and natural resource management 140–1, 146–9, 149, 150 Maldidier, C. 154 mangoes 169 manufacturing employment 101–2 Haiti 170–5, 185; assembly industries 171–2, 185; import substitution 170–1; industrial recovery 172–5 Trinidad & Tobago 10, 192–219; changes in investment and profitability 213–15; contribution to GDP 205–7; differences across industries 207–13; industrialization 196–201 maquiladora sector 76 market failures 145–6, 149 market liberalization 147 maternal mortality 123, 124, 128, 135 Mausolff, C. 152

May 1992 treaty 68 McGee, R. 114 McKinnon, R. 45 McLaren, A. 120 migration 95–6, 144 Haiti 165–6 mineral resources 61, 78 Minujin, A. 88, 89, 96, 104, 105–6 modern agricultural sector 102–3, 104, 105 Montes, S. 144 Moran, D. 154 Mosley, P. 24 NAFTA 75, 81–2, 83 natural resources 9–10, 140–60 degradation 142–6 effectiveness of policy instruments 152–5 environmental policies 149–52 macroeconomic policies 140–1, 146–9, 149, 150 neo-liberal theory 58–9 new tradables sector 102, 103, 104, 105 Nicaragua 40, 135 banking 32–3, 35, 37, 43–4 exchange rate 64, 66–7 social integration and citizenship 88–113 passim tariff reforms 67, 68 trade performance 72 ‘no Ponzi game condition’ 15 non-poor 96–7 see also social integration non-traditional crops 70, 148–9, 168–9 Occupational Conversion programme 100 occupational segregation 124–5, 131–2 occupational structure 94 off-farm labour market 157 official transfers 21, 22, 23, 24, 119 offshore banking 33, 62 oil 61, 199, 205–6, 207 boom 199 price shocks 60

Index openness 71, 72 organic coffee 168 Palmer, I. 126, 127, 132 Panama 135 banking 32, 34, 36, 37 debt 25 exchange rate 64, 67 fiscal sustainability 22 macroeconomic indicators 18 tariff reforms 67, 68 trade performance 72 parliament, women in 121–2, 133–4, 135 pasture management 154–5 Pearce, D. 7, 154 pepper-growing project 169 Pérez-Alemán, P. 130 Pérez Sáinz, J.P. 92, 102 petroleum see oil Pezzey, J. 7 Polak model 15–16 policy effectiveness 152–5 politics 186–8 Pomareda, C. 146 population 117, 118 dynamics 144 growth in Haiti 162–5 Port-au-Prince 165, 179, 184 poverty 4 Haiti 162–5 social integration and citizenship 89, 95–9, 104–9 power 115 precariousness of jobs 103 Préval, R. 187 price leaders 43 prices 164 output price increases 152–4 relative price movements in Trinidad & Tobago 201–3 subsidies 145–6 see also inflation primary deficit 14, 20, 22, 23 private banks 34, 35–8, 50 private investment 10, 192–219 privatization 34, 35, 185 production transformations 127–8 and their social impact 89–95

227

social integration and exclusion 99–109 use of credit 48–9, 51–2 productivity 208, 209, 212–13 profitability 208, 209, 211–12, 213–15 protectionism 58, 170 Psacharopoulos, G. 130–1 public investment 204–5 public sector 12 employment 99, 100–1, 103, 105 Quintero, I.

36

rapid reforms 58–9 raw material costs 208, 209, 211 Rawlins, J.M. 120 Reardon, T. 155 recent poor 96–7 see also vulnerability regional businesses 94 regional integration 80–2 relative exclusion see vulnerability Redclift, M. 140 relative female/male economic activity rate 123–4, 125, 129–30 Renzi, M.R. 95 reproductive rights 119–21, 132–3, 134–5 reserve requirements 42 resilience 7 resource base 1–2 resource management see natural resources Rhoen, A.P. 58 roads 184–5 Rodrik, D. 13 Roman Catholic Church 133 Rondón, R. 44 Ruben, R. 152, 154, 155 rural development programmes 145 Safa, H.I. 116, 130 Sain, G. 145, 147 San José Protocol 60 Sanders, J.H. 151 savings financial liberalization 45–7, 51

30, 31,

228 Index savings – continued public 18, 19 Trinidad & Tobago 204, 205 Schipper, R. 153 school enrolment 122, 123, 128–9, 135 Scitovsky, T. 58 Scott, M. 58 sectoral policies 149, 150 securities markets 38 Segovia, A. 35 seigniorage 15–16, 20, 22, 23, 24 sequencing of reforms 12–13, 59 Serven, L. 192–3 Sheahan, J. 59 small agricultural producers 49–50 Small Business Development Company (SBDC) 199 small enterprises 109 Smyth, I. 120 social assets 115 female access to 122, 123, 126, 128–9, 135 social development policies 108, 109, 136, 150 social indicators 3–5, 122, 123 social integration 9, 88–113 combined analysis 104–7 employment and exclusion 99–103 poverty and exclusion 95–9 production transformations and their social impact 89–95 social sustainability 7 social unrest 173 soil conservation 150–1 soil erosion 143, 162–5 Sojo, C. 67, 90, 93 Solimano, A. 192–3 Sorto, F. 35 Spalding, R. 32 Sparr, P. 132 specialized intermediate inputs 173–4 speculative activities 107 St Cyr, E. 198 stabilization 21–3, 27, 114, 194 gendered effects 125–6 Haiti 187

and sequence of reforms 12–13, 59 see also adjustment state-owned companies 170 state-owned development banks 31, 34, 49–50 Stenman, A. 68 Stern, N. 20 Stiglitz, J.E. 195 Straus, M.A. 123 structural adjustment see adjustment structural poor 96–8 see also exclusion subsistence agriculture 103, 105 Sugarman, D.B. 122 sustainability 6–8 Talvi, E. 45 tariff reforms 58, 67–9, 201 tax burden 13 Taylor, L. 195, 196 teachers 182 technical education 183 textiles industry 208–15, 216 Thomas, V. 194 Thorndike, T. 69 Thorpe, A.T. 70 total debt stock 14, 20, 22, 23 tourism 62, 78, 83 Haiti 178–80, 186 Tourism and Industrial Development Corporation (TIDCO) 201 Toye, J. 24 tradables 12, 26 new tradables sector 102, 103, 104, 105 trade balance 71, 72, 73, 77, 78, 82–3 trade reform 9, 57–87 historical pattern of CAC trade 60–2 liberalization in practice 62–71; external and internal tradeenhancing measures 69–71; forex reforms 58, 63–7; tariff reforms 58, 67–9, 201 outcomes of new trade regime 71–9; Costa Rica 71, 72, 73–5; Guatemala 71, 72, 75–7; Jamaica 71, 72, 77–9

Index trade reform – continued regional integration and new trading environment 80–2 trade liberalization and neo-liberal theory 58–9 transaction costs 152–4 transport system 184–5 Trinidad & Tobago 10, 192–219 adjustment policy measures 194–6, 197, 200–1; financial liberalization 194–5, 197; policy expectations 194, 197 debt 26 economic performance 19, 201–7; debt ratios, monetary variables and deficits 205, 206; GDP growth 203–4; industry contribution to GDP 205–7; investment 204–5; macroeconomic outcomes 203–8; relative price movements 201–3 exchange rate 63, 65, 196, 197, 201–2 fiscal sustainability 23 gender (in)equality 115, 116, 135 industrialization policy 196–201; 1950s to 1973 198–9; oil-boom period 1974–81 199; post-oil-boom and adjustment 199–201 structural changes at micro-level 207–15; changes in investment and profitability by size and industry 213–15; industry differences 207–13; interest expenses 208, 209, 210–11; investment 212; leverage use 208–10; productivity and wages 208, 209, 212–13; profitability

229

208, 209, 211–12, 213–15; raw material costs 208, 209, 211 tariff reforms 67, 69 trade performance 71, 72 Tzannatos, Z. 131 United States Agency for International Development (USAID) 33, 70 migration from Haiti 165–6 occupation of Haiti 181–2 unpaid work 126, 130 urbanization 117, 118, 121, 133, 144 Van den Berg, M. 154 van der Wijk, J. 73 Vega, M. 94 volatility, growth 2–3 vulnerability 88–9, 95–9, 104–9 wages gender equality 130–1 minimum in Haiti 172 sustainable resource use 152–4 Trinidad & Tobago 202, 208, 209, 212–13 Waylen, G. 121 Weiss, A. 195 Wheelock, J. 32 Wierema, H. 146 Wieringa, S.E. 121 Willmore, L. 102 women see gender equality women’s movement 136 work burden, women’s 130 World Bank 12, 17, 24, 33, 192, 193 zona francas/libres (export processing zones) 70, 73, 74, 174–5

Towards Sustainable Development in Central America and the Caribbean

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