ECONOMIC MALADJUSTMENT IN CENTRAL AMERICA

Also by Wim Pelupessy

PERSPECTIVES ON THE AGRO-EXPORT ECONOMY IN CENTRAL AMERICA (editor)

Also by John Weeks

A CRITIQUE OF NEOCLASSICAL MACROECONOMICS DEVELOPMENT STRATEGY AND THE ECONOMY OF

SIERRA LEONE

Economic Maladjustment in Central America Edited by

Wim Pelupessy Lecturer in Development Economics Tilburg University. The Netherlands

and

John Weeks Director. Centre for Development Studies. School of Oriental and African Studies University of London

M St. Martin's Press

© Wim Pelupessy and John Weeks 1993

Softcover reprint of the hardcover lst edition 1993

All rights reserved. No reproduction, copy or transmission of this publication may be made without written pennission.

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Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages.

First published in Great Britain 1993 by THE MACMILLAN PRESS LTD Houndmills. Basingstoke. Hampshire RG21 2XS and London Companies and representatives throughout the world

A catalogue record for this book is available from the British Library.

ISBN 978-1-349-22531-6 ISBN 978-1-349-22529-3 (eBook) DOI 10.1007/978-1-349-22529-3

First published in the United States of America 1993 by Scholarly and Reference Division. ST. MARTIN'S PRESS, INC., 175 Fifth Avenue, New York, N.Y. 10010

ISBN 978-0-312-08632-9

Library of Congress Cataloging-in-Publication Data Economic maladjustment in Central America / edited by Wim Pclupessy and John Weeks. p. cm. Includes bibliographical references and index. ISBN 978-0-312-08632-9 I. Central America-Economic policy. -Central America. I. Pelupessy, Wim. HCI41.E28 1993 338.9728--<lc20

2. Economic stabilization­II. Weeks, John, 1941-

92-18016 CIP

Contents

List of Tables

List of Figures

List of Abbreviations

Notes on the Contributors

Foreword by Gert Rosenthal

Preface

1 Adjustment in Central America Wim Pelupessy and John Weeks

PART I DOMESTIC ECONOMY POLICY

vii

ix

x

xii

xiii

xvi

2 The Nicaraguan Stabilisation Programme of 1989 25 John Weeks

3 The Logic behind the Stabilisation Policies of the Chamorro Government in Nicaragua 41 Oscar Catalan Aravena

4 The Limits of Economic Policy in EI Salvador 53 Geske Dijkstra

5 The Determination of the External Debt of Honduras 67 Luis Rene Caceres

PART II INTERNATIONAL TRADE POLICY

6 Export Promotion and Regional Cooperation in Costa Rica 89 Willy Soto Acosta

7 Costs and Benefits of Costa Rica Joining GATT 96 Olman Segura Bonilla

8 Non-Traditional Exports in Guatemala 111 Ana Maria Colindres

v

vi Contents

9 Economic Prospects for Central America in the 1990s 128 Maria Eugenia Gallardo

PART III AGRARIAN POLICY

10 The Future of Agrarian Reform in Nicaragua Jan P. de Groot and Jan Plantinga

11 Agrarian Reform and Anti-Reform in EI Salvador Wim Pelupessy

Bibliography

Index

147

164

185

196

List of Tables

1.1 Exports of the Central American countries 7 1.2 Capital flight from Central America, 1980-87 8 1.3 Per capita income in Central America: 1975 and 1980s 12 1.4 Private fixed capital coefficient in Central America

(1975, 1979 and 1980s) 14 2.1 Nicaragua: basic macroeconomic data, 1976-89 26 4.1 EI Salvador: growth of Gross Domestic Product (GOP)

and inflation rate 198H9 56 4.2 E1 Salvador: exports (fob) 1979, and 1983-88 57 4.3 EI Salvador: external sector indicators, 1984-89 57 4.4 EI Salvador: composition of public expenditure 1979

and 1985-88 61 4.5 EI Salvador: structure of tax revenue of the central

government, 1982-89 62 5.1 Evolution of external debt of Honduras 69 5.2 Service of the external debt of Honduras 70 5.3 Honduras: debt reduction through savings increase 71 5.4 Reduction of debt through increase of savings 72 5.5 Real rate of interest of the United States 77 5.6 Honduras: external indebtedness which would have

been avoided 83 7.1 Trade balance of Costa Rica 102 7.2 Costa Rica: traditional and non-traditional exports 103 7.3 Costa Rica: central government revenues from imports

and exports 104 7.4 Costa Rica: export and import indicators 105 7.5 Costa Rica: debt indicators 107 7.6 Growth and importance of the service sector in Costa

Rica 108 8.1 Guatemalan non-traditional exports 1980-88 114 8.2 Guatemalan exports to Central America 115 8.3 Guatemalan non-traditional export earnings: hard

currency receipts in proportion to total trade 116 8.4 Guatemala: credit from private banks to agricultural

sector 118

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viii List of Tables

8.5 Guatemala: relationship policy instruments and non-traditional exports 123

8.6 Guatemala: estimated elasticities policy variables 124 9.1 Scenario 1: 1984-87 trends remain unchanged in

Central American economies 132 9.2 Scenario 2: all exogenous variables take their 1970--79

trend 133 9.3 Scenario 3: all exogenous variables take their 1970--79

trend but TX stagnate 134 9.4 Scenario 4: conditions of scenario 3 but IRX grows at

12 per cent 135 9.5 Scenario 5: conditions of scenario 4 but FS decline at

5 per cent and debt is cancelled in 50 per cent 136 10.1 Evolution of the Sandinista agrarian reform, 1979-90:

area affected/distributed in thousands of hectares 150 1l.l El Salvador: distribution of land ownership in 1987 170 11.2 El Salvador: average yields of basic cereals in reformed

sectors: phase I and III, 1985-87 172 11.3 El Salvador: land use by cooperatives, 1980--87 173 11.4 El Salvador: percentage changes in agricultural

production 1980/81-1986/87 178

List of Figures

5.1 Additional borrowing simulation 73 5.2 Total debt simulation 74 5.3 Repercussion of the fiscal deficit of an industrial

country in the economy of a borrowing developing country 79

5.4 Relation between interest rate and income in a developing country 80

ix

List of Abbreviations

AID ARENA

ATC BFA CACM CAS CAT CBERA CBI CCS CDC CONACOEX

CONAPEX ECLAC

ECODEPA ERA FECANIC

FENCOOP FINATA

FMLN

FNT FOB FSLN FUSADES

GATT GDP GEXPRONT

GSP

Agency for International Development (USAID) Nationalist Republican Alliance (political party in EI Salvador) Union of Rural Workers (Nicaragua) Agricultural Development Bank (EI Salvador) Central American Common Market Sandinista Agrarian Cooperative (Nicaragua) Tax Liberation Certificate (Costa Rica) Caribbean Basin Economic Recovery Act Caribbean Basin Initiative Credit and Services Cooperative (Nicaragua) Centre for Peasant Development (Nicaragua) National Coordinating Commission of Exports (Guatemala) National Board of Export Promotion (Guatemala) UN Economic Commission for Latin America and the Caribbean Consumer and Marketing Cooperatives (Nicaragua) Agrarian Reform Enterprise (statefarm in Nicaragua) Federation of Agricultural Cooperatives of Nicaragua National Federation of Co-operatives of Nicaragua National Agricultural Land Financing Agency (EI Salvador) Farabundo Marti National Liberation Front (EI Salvador) National Workers' Federation (Nicaragua) Free on Board Sandinista National Liberation Front (Nicaragua) Salvadorean Foundation for Economic and Social Development General Agreement on Tariffs and Trade Gross Domestic Product Gremium of Non-traditional Products Exporters (Guatemala) General System of Preferences

x

IDB IMF INE INRA IPC ISS ISTA MFA MFN NIC OECD

PLN PDC PERE

PROAGRO

Q qq ROW SAL SEGEPLAN SGS

SIDA UCA UCS UNAG

UNO UNTS UPD

USAID WB

List of Abbreviations

Interamerican Development Bank International Monetary Fund National Institute of Statistic (Guatemala) Institute of Agrarian Reform (Nicaragua) Consumer Price Index

xi

Institute of Social Studies (The Netherlands) Institute for Agrarian Transformation (EI Salvador) Multi Fibre Agreement Most Favoured Nation Newly Industrialised Country Organization for Economic Cooperation and Development National Liberation Party (Costa Rica) Christian Democratic Party in EI Salvador Economic Stabilisation and Reactivation Programme (EI Salvador) State Enterprise for Agricultural Input Trade (Nicaragua) Quetzal (Guatemalan currency) Quintal (100 lb) Rest of the world (exports to or imports from) Structural Adjustment Loan Secretary of Economic Planning (Guatemala) Societe Generale de Surveillance (French consulting firm acting in Guatemala) Swedish International Development Agency Union of Agricultural Cooperatives (Nicaragua) Salvadorean Communal Union National Union of Agricultural and Livestock Producers (Nicaragua) National Opposition Union (Nicaragua) National Union of Salvadorean Workers Popular Democratic Unity (political mass organisation in El Salvador) See AID The World Bank

Notes on the Contributors

Luis Rene Caceres is Head of the Planning Department of the Central American Bank for Economic Integration (BCIE), Tegucigalpa, Honduras.

Oscar Catalan Aravena is Lecturer in Development Economics in the Economic Faculty of the University of Amsterdam, The Netherlands.

Ana Maria Colindres is Research Officer in the Department of Economic Studies of the Bank of Guatemala, Guatemala.

Geske Dijkstra is Lecturer in Development Economics in the Econom­ic Faculty of the University of Limburg, Maastricht, The Netherlands.

Maria Eugenia Gallardo is Research Associate of the Latin American Faculty of Social Sciences (FLACSO), San Jose, Costa Rica.

Jan P. de Groot is Lecturer in Development Economics in the Economic Faculty of the Free University, Amsterdam, The Nether­lands.

Wim Pelupessy is Lecturer in Development Economics in the Faculty of Economic Sciences of Tilburg University, Tilburg, The Netherlands.

Jan Plantinga is Research Fellow in the School of Economics of the National University (ESEUNA), Heredia, Costa Rica.

Gert Rosenthal is Executive Secretary of the UN Economic Commis­sion for Latin America and the Caribbean (ECLAC) in Santiago, Chile.

Olman Segura Bonilla is Lecturer in Economics in the Masters Programme for Economic Policy for Central America and the Caribbean of the National University (UNA), Heredia, Costa Rica.

Willy Soto Acosta is Lecturer in Politicology in the Faculty of Social Sciences of the University of Costa Rica (UCR), San Jose, Costa Rica.

John Weeks is Director of the Centre for Development Studies in the School of Oriental and African Studies (SOAS) of the University of London, England.

xii

Foreword

After more than a decade of political turmoil and economic recession in most Central American countries, the region is now at a crossroads at which it faces the real possibility of a peaceful existence. In this context, it is particularly useful to return to the comparative analysis of economic policies in Central America, since these are relevant for the future. In fact, the region provides a unique set of conditions allowing for fascinating comparative studies: the countries share certain char­acteristics derived from their economic size and geographical location, though they have important social and political peculiarities reflected in differing histories. This book takes into account both these commonalities and differences, as well as recent events, and through a blend of different approaches and perspectives builds upon them to provide useful insights and provocative conclusions.

The various chapters have the merit of drawing attention to the importance of the skewed distribution of income and to absolute poverty in the region. They could hardly do otherwise, given . the history of conflicts associated with the end of the region's three decades of rapid postwar growth and modernisation, coupled with extreme inequalities. Imperfect markets and extraeconomic factors are correctly identified as contributing causes of this state of affairs. The control and exploitation of land is also singled out as a source of income disparities.

Since land is one of the main, if not the principal, source of income, some of the authors examine how different policies have affected the agrarian sector and land ownership in particular, especially in El Salvador and Nicaragua, where the most ambitious land reforms in all of Latin America in the 1980s were implemented. The chapters on these subjects are therefore both timely and useful contributions to the ongoing debate on these issues, in which the transformation of the agrarian sector is seen as part of the broader process of adjustment which the region has experienced.

This adjustment has also involved the implementation of the traditional set of fiscal, monetary, exchange rate and trade policy instruments, which are also subject of analysis. These receive attention in chapters covering El Salvador and Nicaragua, while foreign debt and its external determinants are the subject of an analysis in the case

xiii

xiv Foreword

of Honduras. Identifying the effects of stabilisation policies applied in the context of polarised or wartorn economies provides a useful perspective of the difficulties involved in applying a simple adjustment 'recipe' without taking into account the specific characteristics of the countries involved.

It is to be regretted that an analysis of Costa Rica's stabilisation experience in 1982-3 as well as its subsequent adjustment efforts was not included in the book, since the absence of what turned out to be the most successful and least costly adjustment programme gives the reader a perhaps unbalanced impression of the admittedly high social costs of adjustment. Indeed, this experience demonstrated how the combination of consistent domestic policies adapted to local condi­tions and adequate external finance may have positive results. Never­theless, the critical analysis of the very different adjustment programmes in EI Salvador and Nicaragua does underscore the difficulty of trying simultaneously to achieve growth, social progress and financial stability in any situation, let alone those where social upheaval and conflict, as well as where heterodox policy responses (in the case of Nicaragua) prevailed.

On the other hand, Costa Rica's experience does receive attention within the context of certain trade policy issues. Specifically, the prospects of relying on non-traditional exports a£ sources of adjust­ment and growth in Costa Rica and Guatemala, as well as the economic prospects of the region as a whole, are the subject of attention in additional chapters. Certain readers may not agree with the pessimistic tone of most of the authors regarding the capacity of the region to diversify rapidly and raise the volume of exports, nor with the view that assigns greater costs than benefits to multilateral trade arrangements, particularly for small countries. Nevertheless, the problems arising from the risks associated with relying almost exclusively on one market are undeniable, as are the dangers arising from protectionism in developed countries. Nor can the traditional risks of adverse terms of trade as a result of an over-supply of certain traditional or non-traditional export products be ruled out.

The question that then arises is how progressively to add value to tradable goods and services, thereby creating a flexible Central American export sector capable of continuously upgrading exports so as to minimise the effects of trade barriers abroad, while supporting the existence of a transparent and stronger multilateral trading arrangement which does not discriminate against smaller or weaker countries. The basic challenge involves the gradual absorption of

Foreword xv

technical progress and expansion of education, as well as new institutional arrangements in both capital and labour markets, in such a manner that technology is diffused throughout the economy and investment and income-generating activities are not concentrated in a limited number of enclaves. Many of these aspects transcend the themes covered by this book, though the different chapters certainly illustrate the complexities and nuances that promoting an adequate process of adjustment and development in Central America would require.

In summary, for anyone interested in economic policy-making in Latin America, and, more specifically, in recent events in Central America, this book adds valuable if sometimes polemic insights. It will therefore no doubt nourish the debate on how to tackle the develop­ment effort in the 1990s and beyond.

GERT ROSENIHAL

Preface

During the 1980s and into the 1990s, stabilisation and adjustment packages inspired by the multilateral organisations were implemented by all of the Central American countries (with Nicaragua coming latest to the game). The famous 'Washington consensus' judged these as adequate remedies for the external shocks and internal disequilibria suffered by the countries of the isthmus which arose in the context of serious social conflicts.

By the beginning of the 1980s, an assessment could be made of the impact of these programmes. While the so-called 'social costs' of adjustment have been widely recognised and the call for 'safety nets' for wlnerable groups widespread, there was much slower acceptance in the international financial and aid community of the theoretical and practical flaws of this approach to macroeconomic and trade policy. It is in this context that the contributors to the present volume draw attention to internal and external institutional limits to the implemen­tation of mainstream macroeconomic policy-making. One hopes that our results prove useful in the design of alternative development strategies for the region, strategies that do not require 'safety nets' as an afterthought.

Versions of most of the essays in this book were presented at the Economic Restructuring Symposium of the Annual Conference of the Association for European Research on Central America and the Caribbean in September 1990. The foreword by Gert Rosenthal, Executive Secretary of the United Nations Economic Commission for Latin America and the Caribbean, as well as Chapters 1, 5 and 9, were included later to broaden coverage of countries and topics.

Numerous people contributed to the compiling of this set of essays, and special thanks, for her indispensable work of editing and compiling the index, goes to Elisabeth van Tilburg.

xvi

WIM PELUPESSY

JOHN WEEKS