A Report of the International Commission for Central American Recovery and Development
148
A Report of the International Commission for Central American Recovery and Development
148eBook
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Overview
The International Commission for Central American Recovery and Development (ICCARD) was formed to provide a thorough diagnosis and analysis of Central America’s problems and to draft a comprehensive long-term strategy to move the region from decline to development. In this report ICCARD—through forty-five international experts in economics, public policy, management, and development it assembled for this purpose—attempts to rise above rhetoric and simplistic remedies to focus on well-reasoned, thorough, and realistic approaches to economic and social development.
This volume reviews the unequal access of marginal groups to political and economic participation, the precarious situation of Central American financial institutions, the international debt situation, the prospects for regional political and economic integration, and other aspects of regional development. Each of these challenges is addressed by specific recommendations to the Central American governments, the governments of the industrialized nations, and international organizations.
Product Details
| ISBN-13: | 9780822395997 |
|---|---|
| Publisher: | Duke University Press |
| Publication date: | 07/22/2013 |
| Sold by: | Barnes & Noble |
| Format: | eBook |
| Pages: | 148 |
| File size: | 253 KB |
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The Report of the International Commission for Central American Recovery and Development
Poverty, Conflict, and Hope A Turning Point in Central America
By William L. Ascher
Duke University Press
Copyright © 1989 Duke University PressAll rights reserved.
ISBN: 978-0-8223-9599-7
CHAPTER 1
Roots of the Crisis
Through these recommendations this Commission seeks to promote peace, democracy, and development by addressing the root problems of the current crisis. To put the Commission's strategy in proper context, three major factors in Central America's complex history must be understood: the failure of political institutions to mature during the period of economic expansion from 1950 to 1978; the inability of Central American economic structures to ensure sustainable, equitable development; and the added complications arising from the military involvement of governments outside Central America.
Exclusionary Politics
Throughout most of Central American history, political structures have not shown the ability to modernize and accommodate the interests of all members of society. In the 1970s, all Central American nations except Costa Rica lacked the key attributes of democracy: full participation, peaceful and tolerant means of conflict resolution, observance of civil and human rights, civilian governance through free elections, and social and economic justice.
Central American elites have often excluded other interests through economic, social, and political practices. The military frequently formed alliances with the traditional elite, enforced the closed political system, and assumed a crucial role in the management of governmental affairs. In some cases the military also prevented the development of political institutions and mechanisms that could have served not only to establish civilian control over the military itself, but also to allow less privileged groups to organize and to advance their interests.
As economic growth failed to translate into political and economic decisionmaking power for the majority, the political repression that predominated in most countries of the region sparked vigorous, widespread public frustration. Though economic expansion helped many poor Central Americans raise their standards of living, expanded the middle class, and improved social mobility, neither existing nor emerging social groups were permitted to participate democratically. Elections, when held, were frequently marred by fraud and the marginalization of many political groups. Through campaign restrictions, limited media access, threats, and violence, political parties were excluded from genuinely competing for power. Repression by authoritarian regimes in all countries of the region except Costa Rica eroded faith in political institutions and undermined the public legitimacy of national leaders.
Along with the absence of genuine democracy in Central America, government instability since World War II stymied peace and development. In Guatemala since 1950, chief executive power has changed hands three times through coups, twice through elections widely viewed as fraudulent, once through assassination, and once through U.S. intervention. In Nicaragua, the dictatorial Somoza family dominated politics for four decades. Even after the Sandinistas ousted Anastasio Somoza in 1979, following years of bloody civil war, an atmosphere of confrontation and intimidation still inhibits the achievement of democracy. Of the fifteen Salvadoran administrations since 1950, only two governments came to power through free, open elections. In Honduras, there have been five coups since 1950. Although in the 1980s efforts to overcome political instability and install lasting, democratic governments have made progress, gains toward true democracy remain fragile.
Historically, the active military involvement of foreign interests and powers in the affairs of the Central American states has too often exacerbated civil unrest and government instability in the region. This has occurred at various times since World War II. As local discontent grew, so did repression and political instability; as unrest grew into armed conflict, both governments and local insurgents found support from countries outside the region.
Although guerrilla groups had been active in the region for more than a decade, the late 1970s and early 1980s saw the greatest increase in armed conflict. Civil wars erupted in El Salvador and Nicaragua, and the widespread guerrilla insurgency intensified in Guatemala. Civilian opposition to counterinsurgency programs provided additional support to guerrilla groups.
From Growth to Crisis
Equally important to understanding the causes of the Central American crisis is that despite periods of strong economic growth, the gains from that growth were distributed extremely inequitably.
Central American economies expanded rapidly over the post-World War II period through export-led growth based on agro-industrial activities, accompanied by some import substitution. This growth was characterized by stable terms of trade and high investment rates. During this period of growth, Central America expanded trade with the international community and among the five nations themselves, and the region began to modernize and diversify its narrow economic base.
While aggregate measures of economic health improved, however, mechanisms for distributing the fruits of expansion to the majority of the population were absent or inadequate, and while many people struggled out of poverty over the course of these three decades, rapid population growth actually increased the numbers living in extreme poverty. Rapid urbanization and industrialization created new opportunities for the middle sectors, yet by the late 1970s job creation failed to keep pace with rapid growth in the work force because of labor-saving technologies and reduced business investment. This exacerbated the root causes of the crisis. At the end of the 1970s, growing social unrest alarmed local business communities throughout the region, resulting in a drastic reduction in private investment and substantial capital flight.
In the early 1980s, just as the violence was increasing, Central America's international terms of trade suffered the sharpest downturn in 40 years, as prices for Central America's four primary exports—bananas, sugar, coffee, and cotton—fell sharply and remained depressed throughout the decade. Faced with the resulting trade deficits and the burdens of growing external debts, the governments of the region began to face foreign exchange constraints and adopted diverse measures to ameliorate their respective imbalances. Efforts to curtail imports resulted in progressive restrictions on regional trade.
The Central American Common Market virtually collapsed after 1980, adding to the region's growing trade gap and depressing industrial activity while pushing Central American governments further into debt. The growing tensions among El Salvador, Guatemala, and Nicaragua during this period both reflected and reinforced the structural weaknesses of the Central American economies.
Economic Strengths
The unprecedented period of economic growth, averaging 6 percent annually from 1950 to 1978, demonstrated some strengths of the Central American economies. One was a competitive class of innovative entrepreneurs capable of adapting modern technologies and ideas to export production. Growth in exports came principally from three new areas of postwar expansion—cotton, sugar, and beef. During this period, the nominal value of Central American exports of goods and services to countries outside the region increased thirteen-fold, rising from $250 million to $3.2 billion.
The small size of domestic markets and the proximity to major export markets were other regional strengths which helped to create a willingness to adopt new forms of economic cooperation to take advantage of economies of scale. Just two years after six Western European countries organized the European Economic Community, the five Central American states in i960 established the Central American Common Market (CACM), primarily to facilitate trade in nonagricultural goods. Industrialization followed a policy of import substitution and was stimulated in particular by the creation of the Central American Common Market and by protective tariffs.
Exports expanded despite counterproductive policy measures, such as export taxes, overvalued exchange rates, and import tariffs. Further export expansion was often blocked by closed or restricted markets in North America and Western Europe, even as industrialized countries grew at a cumulative rate of 5 percent per year during the period following World War II and volume of world trade expanded at an annual rate of 9 percent.
Flawed Economic Structures
The economic growth that characterized the three decades up to 1978 rested heavily on the historic roots of the five Central American economies. Since their independence from Spain in 1821, the nations of Central America have had a history of uneven and unequal economic development. By centering their economies on a few agricultural exports—primarily bananas and coffee—they entered the world economy in the late 19th century vulnerable to international cycles of boom and recession. The benefits of growth had gone to a small elite and left out the mass of the population, including peasant farmers and indigenous peoples.
The Central American economies remain dependent on the production of a handful of agricultural goods for export. In the 1920s, coffee and bananas accounted for more than 70 percent of export earnings in all five republics, and more than 90 percent in Costa Rica, El Salvador, and Guatemala. Although the region diversified into cotton, cattle, and sugar in the 1960s, these five agricultural commodities still accounted for more than 70 percent of Central America's total exports, or more than one-third of the region's total gross domestic product in 1980.
Landlessness caused by the agricultural booms was an important factor contributing to social unrest or civil war. El Salvador's high population density and scarcity of land provided the most dramatic examples of the impact of the new commodity production. In 1971, an estimated 29 percent of Salvadoran peasants had no land, a figure which increased to 65 percent by 1980.
During the period of post-World War II expansion, there were modest improvements in the sharing of benefits in Guatemala and Honduras, with a serious deterioration in El Salvador and little change in Nicaragua and Costa Rica.
Population Pressures. The region's population growth rate of 3 percent annually from 1950 to 1980 was one of the highest in Latin America. In just three decades, the population of Central America increased by two and a half times—from 9 to 22.5 million people. Because of this rapid population growth and the heavy concentration of the benefits of economic expansion, more people were living in poverty in 1980 than in the period immediately following the Second World War.
The rapid population growth severely exacerbated competition for land—particularly in light of the large land requirements of cattle and cotton production—and for employment opportunities in overcrowded cities. Unemployment for the region as a whole rose to 13.5 percent by 1986. Underemployment has been estimated at nearly half the economically active population during the 1980s.
Policy Failures. During the years of postwar growth, the Central American governments adopted policies that reinforced severe inefficiencies and inequities in their economic structures. Policy problems included protectionism, the neglect of agriculture, and inequitable credit systems. Fiscal policies adopted during this period were often overly complex, distorting, and ineffective. While in some cases governments failed to collect enough revenues to finance adequate programs to improve the human capital of the poorest social groups, after the oil crisis of 1973 they also undertook expensive subsidy schemes and overvalued exchange rates that reduced the prices of food, thereby hurting small-scale farmers. Although many developing economies have overcome such difficulties, Central America failed to enact necessary reforms and allowed policy errors to become deeply entrenched.
Decline of Intro-Regional Trade
The crisis of the 1980s has had a devastating impact on intra-regional trade. Instead of serving as a buffer against worsening external conditions, intraregional trade has fallen drastically, from over $1 billion dollars in 1980 to less than $500 million in 1986. The adverse effect of this decline on the region's economies can be measured by the fall in exports—to both regional and international markets—from $4.9 billion in 1980 to $3.8 billion in 1987.
Numerous problems contributed to the decline in intra-regional trade. In the midst of severe balance of payments constraints and national political tensions, Central American governments devised increasingly divergent responses to the crisis. In place of fixed exchange rates, low inflation, and free intra-regional exchange, there are now multiple national protective systems, adopted primarily to cope with the adverse world economy. Other problems—including political disputes and the disparity of development among the countries—were also to blame for regional disunity. In addition, economic relations within the region changed dramatically following the Nicaraguan revolution, creating another challenge to economic reintegration.
External Economic Setbacks
While the violence and political upheavals of the late 1970s clearly disrupted growth, external factors further contributed to the economic decline. The drop in world prices for agricultural commodities, coupled with the oil shocks, reversed the terms of trade for Central America's non-oil-exporting economies. The growth in world agricultural trade slowed to 1.3 percent in 1979-86, compared with 4 percent in the 1960s and 1970s. The prices of Latin America's 15 major export products dropped between 25 and 60 percent from 1981 to 1986. Central America's 1984 exports bought 30 percent less than they did five years earlier.
Of additional importance, especially for Costa Rica, was the sudden reduction in supply of commercial bank credit in the early 1980s. The dramatic rise of world interest rates, partly due to the U.S. deficit and efforts to limit inflation, significantly increased the burden of past debt. Debts increased, not to provide productive investment and support expansion of trade, but to meet past obligations. Costa Rica's external debt grew to 102 percent of gross domestic product in 1985. Nicaragua, because of dramatic reductions in exports, required large amounts of official financing. Its debt totaled $6.7 billion at the end of 1986, or more than three times its gross national product. Other countries were affected to lesser degrees.
War and severe economic recession induced by the world economic downturn have created a cascade of problems. The cumulative impact of the social and economic crisis has left Central America with between 1.8 and 2.8 million refugees and displaced persons. More than 160,000 war-related deaths and at least as many war casualties have left tens of thousands of families headed by widows. Nature has also contributed to the human misery, inflicting severe earthquake, drought, and hurricane damage upon the region.
In addition to their costs in lives and human suffering, the wars have added heavy financial costs, including losses in the productive use of human capital. Instability and national insurgencies have led to huge increases in Central America's armed forces, diverting growing numbers of citizens from productive activities. Military personnel have increased for the region as a whole from about 48,000 in 1977 to more than 207,000 in 1985. Even in Costa Rica, there have been sharp increases in the civilian police force.
Indirectly, civil violence caused further damage by adding enormous defense budgets to the resource-strapped governments in the region and by scaring off investment capital. By 1984, approximately $2.5 billion owned by Central Americans was on deposit in U.S. banks. The total amount of Central American deposits held abroad was certainly much greater. Total spending on defense for the region as a whole, meanwhile, jumped from $140 million in 1977 to $600 million in 1986.
In terms of direct economic losses, El Salvador estimates that during the most intense period of the conflict, between 1979 and 1982, the country lost over $450 million in agricultural production and damage to infrastructure. It is estimated that damages and production losses from the Nicaraguan civil war have exceeded $700 million over the last seven years.
The Commission concludes that economic weakness, social injustice, political failure, and relentless violence are interrelated causes of the present crisis. Peace, democracy, and development can only progress together. The process must begin immediately, with support for the most pressing human needs.
(Continues...)
Excerpted from The Report of the International Commission for Central American Recovery and Development by William L. Ascher. Copyright © 1989 Duke University Press. Excerpted by permission of Duke University Press.
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Table of Contents
Contents
Members of the International Commission for Central American Recovery and Development (ICCARD),Acknowledgments,
Preface,
Executive Summary,
Introduction,
Chapter 1 Roots of the Crisis,
Chapter 2 A Plan for Immediate Action,
Chapter 3 A Strategy for Sustained Development,
Chapter 4 Building Democracy,
Chapter 5 Revitalizing Regional Integration,
Chapter 6 International Cooperation,
Concluding Statement,
Notes,
Appendix 1 Immediate Action Plan Tables,
Appendix 2 Capital Requirements,
Appendix 3 Esquipulas II Accords,
Appendix 4 Supporting Documents,
Comments,