Economy & Trade, Europe, Financial Crisis, Headlines, Latin America & the Caribbean

Central America Seeks to Buffer Effects of Crisis in Europe

GUATEMALA CITY, May 3 2012 (IPS) - The economic crisis plaguing many countries in the European Union has forced Central America to look at preventive measures to mitigate the effects in this region, which could include a decline in tourism, migrant remittances, exports and investment.

The search for new markets and proposals for reforms to increase tax collection and impose exchange controls are some of the actions being taken in this region, made up of Belize, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama, with the aim of strengthening the local economies and counteracting external shocks.

“This region needs to look more within itself and towards its neighbours, because the agro-export economic model based on products like coffee, sugar and cardamom is not working,” Jonathan Menkos, an expert with the Central American Institute for Fiscal Studies (ICEFI), told IPS.

Menkos added that “these countries must diversify their production and exports and invest in security, justice, education, health and nutrition, besides coming up with a strategic plan for investment in economic infrastructure.”

Along those lines, in February Guatemala approved a package of tax reforms with which it aims to collect 154 million dollars this year, 552 million in 2013 and 579 million in 2014.

El Salvador, Nicaragua, Honduras and Panama also adopted tax reforms between 2008 and 2011 in the face of the global economic crisis that broke out four years ago in the United States.

The presidents of the central banks of Central America and the Dominican Republic, meanwhile, agreed early this year to adopt measures to ensure financial liquidity, create mechanisms for monitoring risk management and overseeing financial systems, and take steps to mitigate the effects of the crisis in the Eurozone countries.

Central American countries have also recently signed free trade treaties with Colombia and Peru, and are trying to start trade talks with the Common Market of the South (Mercosur), made up of Argentina, Brazil, Paraguay and Uruguay. (Venezuela is in the process of joining as a fifth full member.)

Costa Rica, for its part, established diplomatic ties with China in 2007, and is awaiting approval of a free trade deal with Singapore and exploring other markets like India, all of which has given it greater economic independence, according to analysts consulted by IPS.

The stringent austerity policies adopted by the governments of European countries like Greece, Spain, Portugal, Italy, Belgium and the UK, to address their debt crisis, have caused recession, soaring unemployment and distortions of international trade.

This will impact the countries of Central America, analysts say. In first place, this region’s chief trading partner is the United States, which is affected by the situation in Europe.

In addition, while Central America depends on intraregional trade in second place, its next largest partners are the European Union and Mexico.

In 2010, exports to the United States represented 32 percent of the region’s total, and imports from that country amounted to 38.5 percent, according to the Secretariat of Economic Integration of Central America (SIECA).

“The crisis in Europe will be reflected in slower economic growth in the United States, which in turn will reduce growth in this region,” with effects on trade, international development aid, remittances sent home by migrants living abroad, and tourism, Menkos said.

Monthly economic activity in the region has already begun to slow down since November, says an ICEFI bulletin published in March.

The activities that have felt the slowdown are manufacturing, agriculture and fishing, the report says.

In Central America, which has a total population of 43 million, GDP growth averaged 4.7 percent in 2011, above the Latin American average of 4.4 percent, according to ICEFI.

But inequality and high poverty rates are still serious problems in this region, especially among indigenous people and the rural population.

Economic analyst Mauricio Garita told IPS that the risks posed for this region by the effects of the European crisis “are very large and can multiply because its big trading partner is the United States, and the second is the EU itself.”

But this also represents a major opportunity for the region, he said. “We can try to attract the investment that would otherwise go to Europe, and begin to make headway in areas in which they will fall short, like tourism and technological products,” said Garita, a former SIECA consultant.

The search for new markets can offer many advantages, he said. “There are countries like Nicaragua that have diversified their trading partners with good results, just as Costa Rica is doing with Canada, South America and Asia,” he added.

But Nicholas Virzi, director of economics at the Universidad Rafael Landívar, a private, Jesuit university in Guatemala, told IPS that “Central America lacks a long-term strategy based on free trade and the creation of a good business environment, marked by guarantees for property rights, the rule of law, legal certainty, and healthy money.”

Improving the business climate, establishing clear rules, providing security for people and their investments, freeing up trade, diversifying the portfolio of clients for exports, and flexibilising the labour market are, in his view, some of the measures that the region must adopt – “to start with” – to weather the impacts of the crisis in Europe.

But when will the effects be felt in Central America?

Pedro Prado, with the Association for Social Research and Studies (ASIES), a private local think tank, told IPS it would be “very bold to say exactly when.” He added that this would depend on when the full impact of the crisis hits the United States.

The securing of loans and development aid from the EU, trade, and remittances from migrants could all be affected, the analyst said.

But he added that “in our latest survey, variables like production and the expectations of the business community were very positive. I wouldn’t predict a negative impact in the short term, although it’s necessary to wait, before reaching a conclusion.”