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Growth and Crisis in the Central American Economies, 1950—1980*

Published online by Cambridge University Press:  05 February 2009

Hector Perez Brignoli  and
Yolanda Baires Martinez
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Extract

Prosperity and increasing inequality may well be the most suitable terms to describe at first glance the evolution of the Central American economies from the post-war period until the beginning of the eighties. Prosperity based on a very favourable external economic situation was characteristic of the fifties, with promotion of technological modernization and some diversification in the export sector. Sustained economic growth continued during the following decade, thanks to structural change brought about by industrialization and by the process of Central American integration. This upward trend began to break up in the seventies, and the whole region was plunged into crisis and instability. Although the gloomy side of the new international situation cannot be denied, twenty or thirty years of prosperity seem to have created internal conditions sufficient to nurture a social conflict of vast proportions, which embraces since at least 1978 not only the economic sector but all aspects of Central American life.

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Articles
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Journal of Latin American Studies , Volume 15 , Issue 2 , November 1983 , pp. 365 - 398
Copyright
Copyright © Cambridge University Press 1983

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References

1 The change in net international reserves has been taken as a guide to the behaviour of the balance of payments, since what is of interest is the net inflow of capital. In the IMF's balance of payments presentation, an increase (fall) in net international reserves is recorded by a minus (plus). In Fig. 2. however, in order to achieve a comparison with the visible trade balance, an increase in net international reserves is recorded on the positive axis and a fall on the negative axis.

2 The unfavourable situation deteriorated even further between 1979 and 1982.

3 See Wilkie, J. and Haber, S. (eds.), Statistical Abstract of Latin America. vol. 21 (Los Angeles, University of California, 1981), table 3006.Google Scholar

4 See Isaac, C. Orantes. Regional Integration in Central America (London, D. C. Heath, 1972);Google ScholarW. Wynia, Gary. Politics and Planners (Madison, University of Wisconsin Press, 1972).Google Scholar

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8 General Treaty on Central American Economic Integration, signed by Guatemala, , Honduras, El Salvador and Nicaragua in 1960; Costa Rica joined in 1962.Google Scholar

9 Central American Agreement on Fiscal Incentives for Industrial Development, adopted by the different countries between 1962 and 1969. Each country, since the 1950s, also had in operation special laws governing industrial promotion which continued to be applied.

10 The San José Protocol, adopted in 1968.Google Scholar

11 For a careful examination of the tax base and the relevant political considerations, see Best, M. H., ‘Political power and tax revenues in Central America’, in Journal of Development Economics, no. 3 (1976) pp. 49–82. In Costa Rica, the State adopted social policies which had a significant impact on income redistribution.CrossRefGoogle Scholar

12 In practice, each government has tried to protect industry from Central American competition, for which purpose they offer tariff concessions on imported inputs, including those produced in Central America’, Lizano, E. and Willmore, L., ‘La integración económica de Centro America y el Informe Rosenthal’, in Lizano, E. (ed.), La Iniegración Económica Centroamericana, Lecturas No. 13 (Mexico, 1975), 2 vols. II. 216–47. The reference is to page 237.Google Scholar

13 This refers to the increase in output required as inputs for a given industry. See Albert, O. Hirschman, La Estrategía de Desarrollo Económico (Mexico, 1961); see also the article by the same author, ‘Enfoque generalizado del desarrollo por medio de eniaces, con referencia especial a los productos báricos’, El Trimestre Econódmico, no. 173 (01–03 1977), pp. 199–236.Google Scholar

14 Regarding this situation in Costa Rica, see Oscar, Barahona Streber et al. Los Problemas Economicos del Desarrollo en Costa Rica (San José, EUNED, 1980);Google ScholarHelio, Fallas, Crisis Económica en Costa Rica (San José, Editorial Nueva Década, 1981). One may note that a large part of this reconsideration is based on the alleged contradiction between import-substitution and export-promoting industries; on the limitations of this perspective, see Stefan Robock, ‘Una dicotomía falsa: industrialización a través de sustitución de importaciones o mediante industrias de exportación’, El Trimestre Económico no. 155 (1972), pp. 523–43.Google Scholar

15 Adolfo, Dorfman, La indastrialiación en la América Latina y las políticas defomento (México, F.C.E., 1967).Google Scholar

16 See Albert, Hirschman, ‘La economía política de la industrialización a través de la sustitución de importaciones en América Latina’, El Trimestre Económico No. 140 (1968),Google Scholar on the question of ‘very late’ industrialization. For a chronology of the process of industrialization in various Latin American countries, see Ciro, F. S. Cardoso and Héctor, Pérez Brignoli, Historia Ecóndmica de América Latina, vol. 2, Economías de Exportación y desarrollo capitalista (Barcelona, Editorial Crítica, Grupo Editorial Grijalbo, 1979), pp. 191–3.Google Scholar

17 In Argentina, for example, the food, drink and tobacco sectors experienced between 1900 and 1929 the same proportionate increase within industrial value added as was observed in Central America between 1960 and 1975. Between 1925 and 1948, the most dynamic industrial sectors in Argentina were textiles, transport equipment and machinery. See Carlos, F. Díaz Alejandro, Essays on the Economic History of the Argentine Republic (New Haven, Yale University Press, 1970), pp. 214 and 229.Google Scholar

18 Thus, for example, in El Salvador 79% of manufacturing output was sold to the home market in 1971. See PREALC, Situatión y Perspectivas del Empleo en El Salvador (Santiago, OIT, 1977, 2 vols.), I, 219.Google Scholar In Costa Rica in 1975 more than 80% of industrial production was absorbed by the home market; see Carlos, A. Izurieta, ‘La concentración industrial en Costa Rica’. Comercio Exterior, vol. 32, no. 12 (Mexico, 12 1982), pp. 1346–1357.Google Scholar

19 Measured as the raLly of the value of imports to GDP. Compare the following values of this ratio (in percentage terms) with the figures in Table 3. Argentina Brasil Chile Colombia México 1929 17.8 11.3 31.2 18.0 14.2 1939 10.0 5.6 12.9 12.9 5.9 1950 7.3 7.3 9.0 11.4 8.0 1963 5.5 4.4 12.8 8.2 7.0 Source: ECLA, The Process of Industrialitation in Latin America, Statistical Annex (Santiago, 1966), tables 1–5.

20 On the question of the ‘classical’ exhaustion of countries such as Brazil and Argentina, see Maria de Conceiçao Tavares, ‘El proceso de sustitución de importaciones como modelo de desarrollo reciente en América Latina’, in Andrés Bianchi et al., América Latina: Enstyos de interpretación económica (Santiago de Chile Editorial Universitaria, 1969), pp. 150−79.

21 See an excellent summary in Cline, W. and Rapoport, A., ‘A Survey of Literature on Economic Development in the Central America Common Market’, in Cline and Delgado, , op. cit. pp. 453–82.Google Scholar

22 This approach is more logical from the point of view of economic history, since Central America's existence as a supra-national entity is to a certain extent fictitious.

23 See SIECA/INTAL, el desarroiio inie, grado, op. cit.

24 In the sense used by Gerschenkron, , El atraso económico en su perspectiva histórica, trans. Labastida, S. (Barcelona, Ariel, 1968).Google Scholar

25 See Menjívar, R. et al. , La inversión extranjera en Centro America;Google ScholarGert, Rosenthal, ‘Algunos apuntes sobre el grado de participación de la inversión extranjera directa en el proceso de la integración económica centroamericana’, in Karl-Heinz, Stanzick and Horacio, Godoy (eds), Inversiones extranjeras y transferencia de tecnologia en América Latina (Santiago de Chile, ILDIS-FLACSO, 1972), pp. 336–53.Google Scholar

26 Harry G. Johnson provides a terse comment on this situation: ‘A manera de ilustración conviene observar que, si la empresa extranjera simplemente reemplaza las importaciones por productos internos, cargando el mismo precio y pagando los salarios corrientes a la fuerza del trabajo interna; y remitiendo los intereses sobre su capital y la renta sobre su tecnologia, por concepto de utilidades, el país receptor no ganará nada. De hecho, si la inversión extranjera fuese atraída por un subsidio fiscal o arancelario, el país receptor sufrirá pérdidas’. Johnson, H. G., ‘Direct Foreign Investment: A Survey of the Issues’, Third Pacific Trade and Development Conference (Sydney, 1970),Google Scholar cited in Miguel, S. Wionczek, ‘La inversón extranjera privada y la transferencía de tecnología a México’, in idem, pp. 493–514.Google Scholar See also Miguel, S. Wionczek, ‘United States Investment and the Development of Middle America’, Conference on Western Hemisphere International Relations and the Caribbean Area (Jamaica, 1968).Google Scholar

27 Rosenthal, , loc. cit.Google Scholar

28 This contrasts sharply with the classical process of import-substituting industrialization (above all in Brazil and Argentina), where the initial stages are characterized by a high degree of labour absorption. See María da Conceiçao Tavares, op. cit. p. 169.

29 See Daniel, Camacho et al. , El Fracaso Social de la Integración Centro-americana: Capital, Tecnología, Empleo (San José, Educa, 1979).Google Scholar

30 According to Cline and Delgado (op. cit. pp. 158−64 and 300−39), economic integration appears to have created 150,000 jobs between 1958 and 1972 (direct and indirect employment effects). This represents some 3% of total employment and 14% of the total increase in the labour force in the five Central American republics.

31 Enormous difficulties are encountered in obtaining reliable data on unemployment and under-employment. Mention should be made, however, of the valuable surveys carried Out by PREALC in the first years of the 1970s. PREALC, Situacióny Perspectivas de Empelo en Costa Rica (Santiago de Chile, 1973);… Nicaragua (Santiago de Chile, 1973); … El Salvador (Santiago de Chile, 1973). The ability of the agricultural sector to absorb labour gives a better idea of the scale of the employment problem than the figures on open unemployment. As an example, consider the following estimates (in man-years) for the agricultural sector in Costa Rica (1963), El Salvador (1961) and Nicaragua (1962): Costa Rica El Salvador Nicaragua Required 188,028 209,339 197,034 Available 194,309 484,044 279,934 Difference 6,281 274,705 82,900 Source: ECLA, FAO, OIT: Tenencia de la Tierra y desarroio rural en Centro América (San José Educa, 1973), p. 6.Google Scholar

32 Charles Frank, Max Soto y Carlos A. Sevilla, ‘The Demand for Labor in Manufacturing Industry in Central America’, in Cline and Delgado, , op. cit. pp. 125–80.Google Scholar In Costa Rica, unlike the other Central American countries, no difference appears in the elasticity of substitution when comparing traditional and ‘dynamic’ industries. See op. cit. pp. 148–9.Google Scholar

33 Idem. p. 170.Google Scholar

34 See SIECA, ElDesarrollo Iniegrado… Annex 3, Desarrollo Industrial Integrado, pp. 28–31 and Tables 13 and 14 of the Appendix.

35 One should note that participation in trade unions is much more important in Costa Rica than in the rest of Central America. However, excessively aggregated figures on this participation (such as those found on pp. 187−9 in Clark W. Reynolds and G. Leiva, ‘Employment Problems of Export Economies in a Common Market: The Case of Central America’, in Cline and Delgado, op. cit.) hide a more complex situation. In 1973, only 5.1 % of the industrial labour force was in trade unions. By contrast, the proportion of service employees in trade unions (mainly in the public sector) was 41 % while in the case of transport workers it was 36%. See Cuéllar, O. and Quevedo, S., ‘Condicionantes del desarrollo sindical de Costa Rica’, Revisia de Ciencias Sociales (Universidad de Costa Rica), No. 15–16, (1978), pp. 57–108, in particular table 11.Google Scholar

36 See Gabriel, Aguilera Peralta, Jorge, Romero Imery et al. Dialéctica de Terror en Guatemala (San José, Educa, 1981). Since the middle of the 1970s, the journal ECA, Estudios Centroamericanos, published in El Salvador by the José Simeón Cañas Central American University, has provided solid documentation on the violence and repression in El Salvador.Google Scholar

37 The illiteracy rate in the population over 15 years of age is sufficiently illustrative: 1960 1970 Costa Rica 15.6 11.6 El Salvador 51.0 43.1 Guatemala 62.0 53.8 Honduras 37.0 43.0 Nicaragua 50.4 42.1 Source: Statistical A bstract of Latin America (James Wilkie ed), vol. 9(1978), table 1000.

38 Cline and Delgado, , op. cit. pp. 166–7. Low interest rates were combined with fiscal incentives.Google Scholar

39 The labour force in Costa Rica enjoys an educational and skill level well in excess of the Central American average. On the response of the public sector through the educational system to development demands see Héctor, Gertel ’Economic Fluctuations, the State and Educational Reform Movements: the Case of Costa Rica, 1850–1900’ (Ph.D. thesis, Stanford University, 05 1981).Google Scholar

40 See PREALC, , Siluación y Perspectivas del Empleo en El Salvador (Santiago de Chile, OIT, 1977, 2 vols), i, 151 onwards.Google Scholar

41 See James, Rowles, El conflicto Honduras-El Salvador y el ordenjurídico internacional (1969) (San José, Educa, 1980);Google ScholarMarco, Virgilio Carías y Daniel, Slutzky (ed.), La guerra inútil (San José, Educa, 1971).Google Scholar

42 The official Honduras text presented by the Minister of Economy, Manuel Acosta Bonilia, before the seventeenth meeting of the Consejo Económico Centroamericano, 20–22 March 1969, is given in Carías and Slutzky, , op. cit. pp. 11–122.Google Scholar

43 Jacobo Waiselfisz, ‘El comercio exterior, el mercado comün y la industrialización en relación al conflicto’, in Carías, y Slutzky, op. cit. pp. 167–240, in particular pp. 201–3.Google Scholar

44 Note, for example, the existence of Guatemalan and Nicaraguan investments in El Salvador: Eduardo, Calindras, Fundamentos Económicos de la Burguesía Salvadoreña (San Salvador, UCA, 1977),Google Scholar table 25 in the Annex and of Costa Rican, Salvadorcan and Nicaraguan investments in Guatemala: René, Poitevin, El Proceso de industrialización en Guatemala (San José, EDUCA, 1977), p. 276.Google Scholar

45 In March 1969 Nicaragua introduced customs duties on regional imports, which clearly violated the General Treaty. After intensive negotiations, Nicaragua slightly modified her policy. See Rowles, , op. cit. p. 41.Google Scholar

46 See Delgado, , ‘Institutional Evolution…‘in Cline and Delgado, op. cit. pp. 43–8. Using various indicators on the level of social and economic development this demonstrates the remarkable progress of Costa Rica with respect to the rest of Central America.Google Scholar

47 The index employed has the advantage of making use of indicators of the quality of life, which are based on relatively reliable data. The existing information on the distribution of income is very fragmented and diflcult to interpret. On the other hand, one should note that the reliability of data derived from samples and surveys depends strictly on the methods of data collection, processing, analysis and presentation. It would be naive to suppose that there is no political influence over these methodological choices and the dissemination of the results.

48 Going back even further, there are important contrasts which originate in the colonial period.

49 The reformist policies in Costa Rica have been applied since 1948 as part of a broad social democratic process. There have been important steps in this direction, however, since at least the First World War. See José, Luis Vega Carballo, Poder Política y democracia en Costa Rica (San José, Editorial Porvenir, 182);Google ScholarJorge, Rovira Mas, Estado y Política Económica en Costa Rica, 1948–1970 (San José, Editorial Porvenir, 1982).Google Scholar

50 Mylena, Vega, El Estado Costarricense de 1974 a 1978: Codesa y la fracción indastrial (San José, Editorial Hoy, 1982).Google Scholar

51 The percentage changes in GDP were the following: Guatemala El Salvador Honduras Nicaragua Costa Rica 1979 4.3 -1.6 6.8 -21.5 3.3 1980 3.4 -9.0 1.3 10.7 -1.7 1981 1.0 -9.5 1.7 8.9 -3.6 1982 1.0 -10.0 1.5 2.5 -2.4 Source: ECLA and various estimates (INIES, CRIES, Managua, octubre 1982).

52 Kuznets has studied the limits to the variation of this rate over the long run, using advanced country data. Only occasionally does it exceed 20% of GDP and at times falls below 10%. See Simon, Kuznets, Croissance et structures economiques (trans. Nicolas, A., Prompt, D. and Soichot, J.) (Paris, Calmann-Lévy, 1972), pp. 55–63.Google Scholar

53 Cf., Alexander Gerschenkron, op. cit.Google Scholar

54 The ICOR for agriculture in Honduras and Costa Rica is much higher than in Guatemala and El Salvador. This reflects the importance of plantation agriculture in the former countries, which in turn implies a more intensive use of fixed capital in the agricultural sector.

55 The agricultural export sector in Costa Rica is distinguished by a high level of labour absorption. The dominance of small and medium-size farms in the coffee Sector and the widespread use of wage labour in the banana sector have ensured since the nineteenth century a very broad internal market. Among the new export activities which have developed since the 1950 cattle-raising is distinguished by its low levels of labour absorption.

56 With the exception of Nicaragua in 1978–9, engulfed by the popular revolt which brought to an end the bloodthirsty dynasty of Somoza in July 1979.