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Q&A: Central American "Exports, Production, Employment" Hit by Crisis

Daniel Zueras interviews EDUARDO LIZANO, Costa Rican economist

SAN JOSÉ, Oct 10 2008 (IPS) - The financial crisis in the United States and Europe could cause a fall in Central American exports, tourism, property investments and remittances sent by migrant workers to their families, Costa Rican economist Eduardo Lizano says in this interview with IPS.

Eduardo Lizano Credit: Daniel Zueras/IPS

Eduardo Lizano Credit: Daniel Zueras/IPS

Expectations of short-term benefits from the Free Trade Agreement between the United States, Central America and the Dominican Republican (CAFTA) may not be fulfilled. "Many of them will not materialise, or will be diminished" by the drop in consumption in the United States, which is a "political-psychological problem," according to Lizano, one of Costa Rica's foremost economists.

Lizano, born in San José in 1934, was president of the Central Bank for two periods (1984-1990 and 1998-2002), has been a consultant to several international organisations and is now the honorary president of the Central American Academy, a not-for-profit private institution devoted to social sciences research and policy formulation.

IPS: How could the region be affected by the present financial debacle? EDUARDO LIZANO: The financial crisis has begun to hit us hard. We don't fully know what its effects will be, because we don't know whether it has hit bottom yet. Everything depends on how swift and deep the crisis in the United States will be.

Since the economies of the United States and the European Union are growing more slowly, they will buy less, and import less, so we in Central America are going to export less.

With fewer exports, there will be less production, less employment, and also less investment. If the financial crisis further reduces the growth rates in the United States and the EU, then the real impact will be even greater.

Another aspect that will affect us is that of real estate investments. Some Central American countries have big property developments on their coasts, which were basically being bought by people from the United States. A large number of these projects have been postponed, and others are being developed much more slowly.

Then there is tourism, which is an important source of income for Costa Rica and Guatemala. If the crisis means that people stop travelling, tourism flows will be reduced and the impact on the hotelier business will spill over into the rest of the economy.

In fourth and last place, a very important issue for the region, especially for countries like El Salvador, is remittances from workers in the United States. Economies like that of El Salvador have already felt the effects of growing unemployment in the North, and immigrants, many of whom are undocumented, are the first to feel the impact, so they send less money, or none at all, to their families back home.

IPS: Is the outlook that grim? EL: It's not entirely bleak, because the slowdown in the world economy has lowered the prices of products imported by Central America, like oil and food. Our economies import virtually all of our oil, which was costing 130 dollars a barrel and is now down to 90 dollars.

This is bad news for other Latin American countries that export oil (like Venezuela and Ecuador) or food (lik Brazil and Argentina). They will feel this as a negative impact. But this aspect of the crisis benefits us in Central America.

IPS: What are the negative implications of the crisis for countries that are parties to CAFTA – Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras and Nicaragua – whose main trading partner is the United States? EL: There is, we might say, a political-psychological problem. One of the main reasons CAFTA was approved was the hope that positive results would be achieved relatively quickly. Now, a significant proportion of its expected benefits will not be achieved, because the chief hope was that Central America would receive increased investment to produce goods for export to the United States.

With a considerably lower level of consumption in the United States, those investments will not be made and the expected benefits will not materialise, or will be diminished.

IPS: How do you think Costa Rica's image is affected by its continued postponement of the entry into force of CAFTA (the deadline has been deferred for a second time, until Dec. 31), and how could this affect its future trade relations with its partners? EL: We are very ashamed of what is happening. Costa Rican President Óscar Arias met recently with the other Central American presidents and with U.S. President George W. Bush, and had to begin with an apology.

Costa Rica is making a very poor showing in terms of its ability to make decisions. It's fine not to make decisions of this magnitude in haste, for instance in one or two weeks, but the country has taken four years over this one.

IPS: What is the main threat looming over Central America? Do you think the region is prepared for the crisis? EL: This crisis is not going to affect us too much. Our countries are not sufficiently integrated into the international financial systems. We can lose individual investors without the local economy being hurt. The threat will be from the real economy, if exports suffer. That will depend on how deeply and for how long the United States is in crisis. Exports, production, employment, those are the things that will affect us most.

IPS: But in recent years, large international banks have entered the region. With the shaking of the financial system's foundations that we have seen, couldn't Central American savers be affected? EL: Large banks have made an entrance. One, Scotiabank, is Canadian, one is from the U.S., Citibank, and another, HSBC, is British. Of the three, Citibank has been hit hard by the crisis but the other two much less so. If any one of the three wobbles, as has happened to other North American banks, it would be a whiplash of the crisis that could, indeed, affect us.

IPS: President Arias said that after a reduction in poverty in Costa Rica, this year it would grow again. Isn't that worrying? EL: Yes it is, because for 15 years we have had a poverty rate in Costa Rica of around 20 percent, and last year we managed to reduce it by nearly three percentage points. It would be very disturbing to reverse our success and go back to the previous situation. It would be a pity for that effort to be wasted.

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