Economic Development of Economic Development of Central AmericaCentral America

Econ. 4200Econ. 4200- Spring 2004 –- Spring 2004 –

Dr. TaylorDr. Taylor

Centroamérica, América Central, and Middle America

• Strictly speaking, Central America (or, centroamérica) comprises five countries: Guatemala, Honduras, El Salvador, Nicaragua, and Costa Rica. • These five countries (plus the area that now constitutes Belize) span the territory that was part of the Vice Royalty of New Spain, which also included Mexico and part of present day United States.

• After Mexico declared independence from Spain, the landed class in Central America annexed themselves to Mexico in 1822, but broke their tie a year later to become the United Provinces of Central America.

• Panama had always been part of a different vice-royalty – first the Vice Royalty of Peru, then of Nueva Granada (centered in Venezuela). As is commonly known, Panama had been part of the country of Colombia, when the United States support independence forces at the turn of the last century in anticipation of a transoceanic canal.

• Belize has a special history of more than two centuries of English and then African settlement. It had been a British colony until 1981, well after most of the rest of the empire achieved independence. This is because neighboring Guatemala claimed a large part of the Belizean territory. Despite recognizing Belize’s independence in 1991, Guatemala has not given up its territorial claim.

• Some scholars have referred to “Middle America” as short-hand for centroamérica, Belize, Panama, the Caribbean, and the Guyanas on the north-eastern coast of South America. Central America (including Panama) and the Caribbean (including Belize) have historically been treated as distinct regions and have their own distinct scholarly literature.

• Still, the states of the two regions confront similar challenges (if distinct histories) that make joint analysis useful. They are very small countries, with small economies largely based on agriculture and some mining. They are all very close geographically to the United States. And, they are very poor.

• This class will focus on the five countries of centroamérica, but also includes some materials on Belize, Panama, the Caribbean and Mexico (today exerts more influence in the region than the US).

Perceptions of Latin America and Central America

• Why is this important? Because the political, economic and social development of Central America has been fundamentally shaped by forces – both domestic and foreign – influenced by particular perceptions of the indigenous peoples, the region’s natural resources, and the structure of opportunity in international markets.

• These forces typically overran, destroyed, marginalized or simply ignored the people, cultures, and native ecology of the region in successive boom and bust cycles of economic (specifically, agricultural) development.

• A survey that was taken concerning how citizens of the United States perceive the Latin American people. Respondents were given a card with nineteen words on it and were asked to indicate those words that seemed to describe best the people of Central and South America.

• The percentage of respondents selecting each word as an apt descriptor of were as follows:

Dark-Skinned 80% Imaginative 23%Quick-Tempered 49% Shrewd

16%Emotional 47% Intelligent 15%Religious 45% Honest 13%Backward 44% Brave 12%Lazy 41% Generous 12%Ignorant 34% Progressive 11%Suspicious 32% Efficient 5%Friendly 30% No answer 4%Dirty 28% No opinion 0%Proud 26%

• Now, guess when this survey was taken. 2000? 1990? 1970?

• The survey was taken in 1940!

• Do you think U.S. citizens would identify the same characteristics today?

• My guess is that the rank order of the words would be similar, but less strongly skewed.

• U.S. stereotypes and the Central American reality: As in all generalizations there is some truth … and great falsehood.

• Central Americans are an extremely complex, diverse people who are struggling to cast off the stereotypes of the past and to find their own way into our increasingly interconnected, global world.

“Sons of the Shaking Earth: Life in the mouth of the volcano”

• A well-known study of Middle America by anthropologist Eric Wolf, captures in its title the critical interplay between people and the land in Central America. It asserts that the land is violent and that the inhabitants of the region live in an environment that is often shaken by natural disaster.

• The dominant geographical feature of Central America is the impressive and forbidding range of volcanic mountains that runs from Mexico to Panama. These mountains have always been obstacles to communication, to the cultivation of the land, and to the national integration of the countries in which they lie.

• Over the centuries, eruptions and earthquakes have destroyed thousands of villages. Some have recovered, but others remain buried beneath lava and ash. Nearly every Central American city has been destroyed at one time or another; and some, such as Managua, Nicaragua, have suffered repeated devastation.

Article: “Small, vulnerable – and disunited” … questions:

1. Combined, the population of Central America is similar to what state?

2. What is the main export of the region?

3. What is CACM?

a. Is it a common market, a customs union or both?

4. What are the biggest obstacles to further integration?

5. What is one of Mexico’s Mr. Fox’s greatest difficulties?

a. Puebla-to-Panama Plan … what does this call for?

b. Is this a new idea?

c. Is there widespread support for Mr. Fox’s plan?

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Note: CAFTA …The U.S.-Central American Free Trade Agreement (CAFTA) is a free trade agreement between the U.S. and the five Central American nations of Guatemala, El Salvador, Honduras, Nicaragua, and Costa Rica.

• CAFTA is an extension of the same policies put forward in the North American Free Trade Agreement (NAFTA). • The implementation of CAFTA is seen key by the Bush administration and multinational corporations in obtaining the Free Trade Area of the Americas (FTAA), which would cover all the countries in the Western Hemisphere, except Cuba.

• CAFTA is closely linked to the Plan Puebla Panama (PPP), a 10-year long, multi billion dollar mega development project that will construct physical and industrial infrastructure throughout the region.

• Civil society groups in Mexico and Central America see the PPP as paving the way for CAFTA and FTAA. These groups have protested the PPP because of the devastating impact that it is seen having on the environment, indigenous communities, and local economies.

• Final negotiations concluded in December (2003) and the U.S. Congress will vote on whether to approve CAFTA early this year.

Making an Economics Presentation

Rule #1: Nothing is more deadly than a presentation delivered as it was written.

1. The Structure of a Presentation…

• The Rule of Tell'em:

[1] Tell'em what you are going to tell'em,

[2] Tell it to them, and then…

[3] Tell'em what you told them.

• Translation: Start with an introduction; including an "agenda" or set of goals for the presentation, provide the content; information and summarize the presentation.

• Last is First – The Summary/Conclusion Slide

[1] One researched "fact" of presenting that has been around for a while is that most people attending a presentation will "remember" no more than five key points.

[2] What you have to determine is what are the key points.

• How do you get your audience to remember what you want them to?

[1] Start with the last slide.

[2] When you are ready to create your presentation, forget the details for a minute, forget the presentation's organization,

instead:

[3] Write out your conclusion or summary slide first! It should emphasize the most important points you plan to make.

[4] Once you have visualized those points, it's relatively easy build your presentation around them.

2. The Basic Rules of Good Presentations…

 KISS - Keep It Simple Stupid

• There are numerous ways to apply this ancient adage. The bottom line is that the more complicated you let things get, the more trouble you can expect.

• Rehearse the presentation…

[1] To present the most professional image, you need to know your presentation.

[2] Rehearsing the presentation includes more than just going over what you will be saying. Rehearsing includes the entire presentation. Use the same tools too. 

[3] It's OK to occasionally leave the main "script" but, wandering presentations that lack focus, or those too dependent on working from notes, or long pauses to compose your thoughts are never acceptable.

• Don't memorize: Rehearsing is one thing, committing the presentation to memory and performing it by heart, is not the way to go. You need to present, not to recite.

• Use your notes very sparingly. Too much time spent reading notes may convince your audience that you are unprepared.

• Dress for success.

• Pace yourself - don't go too fast, or too slow.

[1] A general rule, every "slide" deserves at least 10 seconds, and none rate more than 100.

• Determine your communication needs, the presentation environment, and select the right group of tools to get your message across.

• Creating support materials: Don't assume that your message will stick. Provide your audience with the right support materials.

3. It is Time to Speak Out -- Giving an Effective Presentation

• On Fear and Death...It's been said that most people, including a great many executives, fear presenting to large groups even more than they fear death. You are not alone.

• The naked audience … the friendly faces …. deep breathing (calm and center yourself).

• Your place as a presenter ... controlling your audience. Face your audience. Observe them. Make eye contact … don't wander around the room, don't look down.

• Lose the computer … that is … don't hide behind it. Get a remote mouse and get back up in front of the group, where you belong, as presenter, leader, moderator, and communicator.

• Retain control of the flow of the presentation. Where appropriate defer questions to later in the presentation or afterwards.

• If you do defer any questions: Follow through as promised. Nothing will damage your credibility in the long run, more than not keeping your word.

4. Now what will make it even better? …

• Enthusiasm … Absolutely nothing will help your presentation more than communicating with passion and confidence.

• The power of language … The words you select will dramatically impact your audiences reaction – to both your ideas and your effectiveness as a presenter.

• Humor -- The right amount of humor - used judiciously, can go a long way to build rapport with your audience, and keep your audience interested and attentive. As a rule, don't tell jokes for their own sake, drop in your humor where it fits, relating to a point, or a break between sections.

• Quotations … Appropriate quotations can make a noticeable impact on your audience. Make them relevant … and interesting.

• Have a backup plan: What if your projector dies, computer crashes, slide tray still on the table at home. What is plan B. (And did you practice it?)

• Five things to do when you are done…

[1] Thank them!

[2] Make materials available.

[3] Make yourself available.

[4] Provide them with a method of reaching you.

[5] Get feedback.

Concepts to Define & Understand at the Beginning…1. Comparative advantage - def: A nation has a comparative advantage over a

trading partner in the production of an item if it can produce that item at a lower unit cost than its partner.

Implications...a. Any country can increase its income by trading, because the world market

provides an opportunity to buy some goods at relative prices that are lower than those which would prevail at home in the absence of

trade.b. The smaller the country the greater this potential gain from trade, but all

countries benefit to some extent.c. A country will gain most by exporting commodities that it produces using its

abundant factors of production most intensively, while importing those goods whose production would require more of the scarcer factors of production.

2. Exchange rates - def: The price of one nation's monetary unit in terms of the monetary unit of another country.

a. Foreign exchange market: A market in which buyers and sellers of bank deposits denominated in the monetary unit of many nations exchange

their funds.- Exchange rates can be allowed to fluctuate freely, can be "managed" or

can be pegged to the currency of a major trading partner. => Graph

Demand side - People who want to import Costa Rican goods, invest in Costa Rica, or travel in Costa Rica, or others who just want to hold colones.(1) When North Americans demand more Costa Rican products, (D curve shifts right) the price of the colon will rise in terms of dollars.-Supply side - those who want to import goods into Costa Rica from the United States, invest in the US, travel in the Us or hold US dollars.(2) When Costa Ricans demand more US cars or computers (S curve shifts right) the price (in $) of the Costa Rican colon will tend to decline (S of colon shifts r)

AAppreciation and depreciation of a currency:WWhen country A's currency becomes more valuable relative to country B's, country A's currency is said to appreciate relative to that of country B … and country B's currency is said to depreciate relative to that of country A. Note: Two countries in the region use the US dollar as their national currency … what are their names (colon, balboa)? Why do you think they have adopted our currency?

Determinants of Exchange Rates:

1.      What determines the relative positions of S&D curves for currency?

(a) Relative price levels - constantly changing

(b) Relative rates of growth

(c) Relative interest rate levels

(d) Expectations

… Difference between foreign direct investment & foreign portfolio investment.

… Example of Argentina (Jan. 2002)

3. Balance of Payments - Exports (X) & Imports (M)

B of P = PxX – PmM

Px - vector of prices of exports

Pm - vector of prices of imports

Surplus = excess of exports over importsDeficit = excess of imports over exports… effect of exchange rates on BoP.

4. Domestic Absorption (A) = The national expenditures on both home-produced goods and imports.

- Not equal to B of P...If A>GDP => trade deficitIf A<GDP => trade surplus

- How does a nation pay for domestic consumption (absorption) above and beyond GDP? => Draw down domestic savings and/or borrow from abroad (increase external debt).

5. Import oriented trade policy & development strategy:•The substitution of domestic production for imports of foreign manufactures.•Was first explored by Latin American countries when their primary exports

markets were severely disrupted, first by the Great Depression of the 1930s and subsequently by the breakdown of commercial shipping during World

War II. Deteriorating terms of trade for primary products hurt LA economies.-Emerging from the war with fledgling industries, countries like Argentina, Brazil,

Columbia, and Mexico began systematically to sustain these manufactures by erecting tariffs and other barriers to trade-competing imports from the US.

-Latin America developed import substitution regimes with a multitude of protective techniques that were later emulated by other developing countries.

•Raul Prebish: Argentine economist … developed theory to support.… Conditions for success:(1) Identify large domestic markets, as indicated by substantial imports over the

years.(2) Ensure that the technologies of production can be mastered by local

manufacturers or that foreign investors are willing to supply technology, management, and capital.

(3) Erect protective barriers - Either tariffs or quotas on imports, to overcome the probably high initial cost of local production and make it profitable for

potential investors in the target industries (“infant” industry argument).

(a) First targets => Consumer goods industries (processed foods, beverages, textiles, clothing, and footwear – with technologies easily obtained and mastered by domestic producers)

(4) Keep an overvalued exchange rate => Imports are cheap (in particular, intermediate inputs are cheap) and exports are expensive to foreigners (reduced dependence on foreign markets for economic well-being … foreigners just won't buy your products)

- Remember that until 1929, economic growth in most of Latin America was almost entirely linked to the fortunes of export production.- The Great Depression => falling export volume and prices => created a severe recession throughout the region in the 1930s.

=> Marked change in national economic policy…(1) Many governments introduced policies to maintain the level of internal demand.(2) WWII: Demand for Latin America's agricultural and mineral products rose but imported manufactures were scarce. Some of the unsatisfied demand began to be filled by homemade products.(3) Following the end of the war, most Latin American governments formulated clear policies to foster "import-substituting industrialization".

- Governments improved the region's transport system and expanded the supply of electricity and water (public owned enterprises).- Governments helped finance local industry and welcomed foreign

corporations willing to establish factories in certain industries.

- Still the strategy failed to resolve the Latin American tendency to import more than it could export.- In fact the import strategy contributed to the problem because the new factories were dependent on foreign suppliers for machines, spare parts and intermediate products.- As the policy ran its course, domestic markets became exhausted...if

economic growth was to be sustained at home, then foreign debts had to be incurred (Cent. Am. perennial interest in trade arrangements: bigger markets). • Eventually, many developing nations faced a breakdown… (run out of loans and must reduce exchange rates).

- When this occurred the wealthy and powerful were the first to know: domestic currency will exchange into a larger number of foreign currency per unit. Economic reality => the national currency must depreciate => Capital flight: Causes the domestic currency to depreciate rapidly.

- Devaluation typically reduces imports and increases exports but in the import trade strategy environment, the dependency on imported goods made the demand for foreign goods inelastic. => Imports did not fall yet became more expensive to obtain. => Also, reducing imports would mean reduced employment (politically unacceptable). => Worsen the balance of payments/foreign exchange problem (plus

undermine populist politics).

[Other issues related to this development regime…- Government felt compelled to borrow as much as possible from external

sources (plus to print money to pay their domestic bills => often led to hyperinflation).5- Levels of efficiency in the new industrial plants were sometimes rather low:

Limited size of the home market … couldn’t attain economies of scale (especially true in Central America).

Many producers used technology designed to produce high volumes of output (higher than Latin American countries could support).

- Problem made worse because the technology incorporated in domestic industry was often capital-intensive even though more labor-intensive techniques were available.-      Many firms operated at capacity levels below 50%!

- Governments had introduced productive tariffs and quotas (or total ban on certain imports) to protect domestic producers and in some instances domestic producers had monopoly status => little incentive to improve management or labor practices so the prices of local manufactured goods rose above those available in international markets.

- Also, very powerful domestic interests resisted dismantling tariffs and quotas that protected their favored status (import of luxury goods exempt and financial benefits of import licenses under quota system).

- The rate of job creation was much lower than had been hoped for … largely because of the rapid growth of the labor force (from both urban migration and high rates of population increase) but also because of capital intensive production techniques favored.

6. Export oriented trade policy & development strategy: - outward looking trade strategy –

… or the neoliberal agenda.

- Allows a nation to realize, as fully as possible, the inherent gains from their comparative advantage through free markets.

- Often means primary-export-led growth (drawbacks: vulnerability due to volatile price swings, plus low profit potential).

- Starting in the 1960s there was the beginnings of an intellectual return to free trade thinking and attempts were made to encourage Latin American countries to export more to the developed countries.

- Stimulus here was the budding success of the Asian Tigers or NICs (Newly Industrialized Countries: Hong Kong, Korea, Singapore and Taiwan) who were successfully penetrating MDNs’ (More Developed Nations’) markets.

- Encouraged by the advice of the World Bank, several governments including those of Brazil and Colombia began to reduce levels of domestic protection and to give incentives to export producers.

[a] By 1970 this had become an accepted way of sustaining industrial expansion.

Conditions for Success:

(1) Maintain an exchange rate that helps make it profitable for domestic producers to sell their crops, manufactures, and services on world markets.

The lower the exchange rates, the more desirable the nations products will be to foreigners.

- As exchange rate decreases => exports rise while imports fall => goal: to get nation to run a balance of payments surplus => give them foreign currency to service and reduce external debt.

(2) It may be necessary to subsidize some exports to induce manufacturers and farmers to invest in capacity for the export market (infant industry argument again).

(3) If governments want producers to turn towards world markets, they must reduce the relative attractiveness of production for the domestic markets => reduce high protective tariffs for favored industries, eliminate quotas on imports (hard to do).

(4) Often means primary-export-led growth or manufacturing goods with a low import content (drawbacks: vulnerability due to volatile price swings).

7. Hyperinflation - Inflation (absolute increase in price level) at very high rates of usually 200 percent or more prevailing for at least one year.

- Caused by one factor … government printing too much money to pay its bills.

- Why is it bad?A. Uncertainty and therefore higher risk => less investment (both from domestic

and international sources).B. Functions of money destroyed ... store of value, unit of accounting, unit of

exchange.=> No lubricant to machinery of economy => friction=> slows down (revert to barter). Transactions costs soar. Economy slumps into recession.

C. Why is it done? Effectively a tax without increasing official tax rates (government uses money right after it is printed thereby using it when it has the greatest purchasing power...those who receive it later have reduced purchasing power therefore have transferred, unknowingly, some of purchasing power which would have been theirs to the government (inflation tax).

- Especially impacts the poor.D. Solution... Introduce a new currency or abandon currency ($...Panama, El

Salvador and Ecuador have done; plus the US $ accepted almost everywhere).

8. The International Monetary Fund (IMF):- What is it?- Critics=> IMF tool of MDNs lying in wait to get control of the nation's economic

policies and reshape them in a monetarist, market oriented, conservative model (neoliberalismo).

- International role of IMF is to extend emergency credit (short-term not long-term credit!) to member nations who get in trouble.

- Problem: It is partisan and has a standard package that includes:[1] Monetary restraint and devaluation (reduces domestic demand and reins in

inflation… devaluation also reduces appeal of capital flight )[2] Reduce/Eliminate quotas and tariffs => open up economy to market forces.

[3] Government spending reduced (get rid of government deficits).[4] Limit on wage rate increases (in countries with high inflation there are also

price controls to help break inflation psychology [structural inflation] - Argentina, Brazil and Peru).

[7] Overhaul tax structure to reduce loopholes for wealthy and to make more efficient.

Goal: Reduce excess demand and to reorient the structure of national production away from imports and toward exports (low import content: based on comparative advantage… focus on labor intensive manufactured goods and primary good production).

- All subject to periodic review: If they haven't followed guidelines they lose additional funding or must accept an even more stringent set of guidelines.

99. Capital flight: A rapid and massive conversion of domestic currency for that of a major international reserve currency and movement of that reserve currency out of the country to an off-shore financial haven.

- When devaluation is about to occur, the wealthy and powerful are the first to know: The overvalued exchange rate means that at crisis point the domestic currency will exchange into a larger number of foreign currency per unit. Economic reality => the national currency must depreciate => capital flight: helps to depreciate the domestic currency rapidly in a short period of time.- This often creates volatile financial markets, increases risk, increases interest

rates and reduces economic growth (often causing a recession).-     Psychology imbedded in wealthy Latin culture to have one financial foot in

and one financial foot out of home country. Also, the increasing presence of “foreign portfolio investment” is contributing the problem.

“Trouble in Paradise”, The Economist, November 21st, 2002

• What is the most widespread language spoken in the Caribbean?

• Which country has the highest and which the lowest per capita GDP?

• What are the three major economic problems facing the region?

1. Big debt problems … chronic mismanagement.

2. Tourism revenues falling … biggest earner for most (high cost).

3. Changing trade rules … preferential trade agreements with EU … to be phased out between 2006 and 2009.

• What two regional nations might be able to compete with Brazil in sugar production?

• How big is the regional drug trade? “Where bananas can grow so can fine marijuana.”

• Has the diversification by some countries into “offshore financial services” created an alternative economic base that will help sustain economic growth?

• Collectively, how do you think these issues will affect economic growth and the standard of living over the next 10 to 20 years?

Evaluating and Comparing Economies:A. Need some definitions before we go on...Institution: Institutions are rules of the society that structure the interaction

among people.•Are made up of formal rules and regulations.•And informal rules as well at times.•Changes in working rules can modify institutions or create new ones, with the

economy evolving in the process.•Institutions, collectively, are the framework within which all of human

interaction...political, social and economic...takes place.•Capitalism => Adam Smith - dominance of "the invisible hand" in guiding

economic activity. Limited role of government (provide public goods and define the rules of the game).

[a] Translated to “Washington Consensus” or “Neoliberalismo” in Latin America during the 1980s and 1990s.

• Prevailing Norm: The philosophical basis accepted by authorities and the economy's performance determines whether the working rules are retained, modified, or replaced.

[a] Philosophical basis... church + philosophical basis = attitudes => working rules.

• Historical legacy and context…

- Joseph Schumpeter: “The subject matter of economics is essentially unique process in historic time. Nobody can hope to understand the economic phenomena of any, including the present epoch, who has not adequate command of historical facts and an adequate amount of historical sense...”• Evaluating and Comparing Economies:

- The performance of an economy is influenced by goals and priorities established by authorities and by environmental factors such as technology, natural resource endowment, and international economic and political factors...all interrelate.

- How the economy performs, relative to stated goals and priorities (prevailing norm), determine which other economic, social or political policies are necessary.• Evaluating and comparing economies cannot be purely objective.

- Conclusions influenced by the analyst’s point of view... the comparor’s norm.

- The comparor’s norm is based on the analyst's values indicating what goals and outcomes are most important for a country to attain. In every

instance it determines the choice of evaluation criteria use in examining a country’s performance.

A. Evaluating the performance of an economy...

1. An economy's performance can be defined in many ways, depending upon the performance criteria, methods of measurement and weights attached to each criterion when overall performance is calculated (the performance index).

- The choice of criteria is up to the analyst.

2. Four steps to follow:

a. The analyst’s definition of performance

b. The identification of performance indicators for each criterion.

c. The measurement of these performance indicators for each criterion.

d. The compilation of a performance index for cross-comparisons.

- Includes weighting - must be made explicit.

3. Criterion examples.

- Economic growth (change in GDP or GDP per capita)

- Economic stability (low inflation, stable exchange rate, low unemployment, etc.)

- International balance of trade, external debt and debt service ratios.

- Socioeconomic factors (e.g. literacy, caloric intake, telephones, mortality, etc.)

Weaver text: #1 Conquest and Colony, 1500 to 1700• Where did the Maya empire develop and why did it happen here?• What was Darien, Panama and was this venture successful?• How did the Spaniards approach the indigenous people of the Central America?• What area of Central America did the Spaniards prefer and why?• Is the land area homogeneous or heterogeneous? Has this hindered or enhanced efforts at regional integration?• Who conducted the conquest of Central America? How did the Spanish crown control them? Did they come to colonize?• What was the most important factor in the conquest of Central America? How did this affect the indigenous population?• After the period of looting and slaving, what became the base for providing wealth of Spaniards?• What was an encomiendas? What was the “tribute” system?• What was the Captaincy General of Guatemala and where was it headquartered?• What is “mercantile colonialism” and why did European monarchs turn to it?• Was Central America central to the “tribute empire” established by the Spanish crown?

• What was the hacienda system and how did it differ from the encomiendas system?

• What institution was the major source of credit throughout the isthmus?

• Define the following terms: criollos, peninsulares, castas, mestizos, mulatos, zambos, ladino.

• What effect did the 17th century depression have on the region?

Wanted: a new regional agenda for economic growth

• What is the “Washington Consensus” and how did it get so named?

• Neoliberal or neoconservative agenda?

• For a while it seemed to work: inflation dropped to reasonable levels, real GDP grew vigorously and poverty incidence began to fall. Moises Naim, editor of Foreign Policy and former Venezuelan trade minister, declared that the “Washington consensus is a damaged brand.” Why?

• Does the article support this view? Based on recent work of John Williamson and Pedro-Pablo Kuczynsky (former Peruvian economic minister).

• What do the authors point out as Latin America’s “long-standing socioeconomic weaknesses”.

• What do the authors recommend become the features of a “new” Washington consensus?

#2 Colonial Reform, Political Independence, and the Liberal Experiment, 1700 to 1850

• What fueled economic growth in the region from 1740-1790?

• How did the Bourbon king coming to power in Spain affect Central America?

• How did the expansion of the cotton textile industry in Europe affect Central America? And which country was most affected by this?

• How did this affect the financial markets in Central America?

• What was the view of locally produced goods by the Spaniards?

• Why did the Spanish crown’s influence decline so sharply from 1790 to 1810?

• Explain the following statement: “Spanish American independence was the project of those doing the subjugating and colonizing, not by the subjugated and colonized.”

• Why did the criollos fight the wars of independence between 1815 and 1824?

• Where was the center of the move for independence in Central America and why?

• What did the “assembly of notables” do on September 15, 1821? Did their decision work?

• Then what happened in July 1823?

• Was the transition from the United Provinces of Central America (1824) to independent nations as peaceful as the transition to independence from Spain?

• What was the “conservative vision” and the “liberal vision”? What groups tended to support each vision?

• Who was Francisco Morazan? What institutional reforms did he implement?

• Who was Jose Rafael Carrera and how was he a reaction to the liberal program?

• What was the significance of the completion of the railroad across Panama in 1855 and why did this bring US involvement to the isthmus?

• Who was William Walker and what did he do?

• After this the process of national consolidation, state formation and economic progress (centered on export of coffee and bananas) began… mid-nineteenth-century. Coffee wealth became a base in many countries for generating a governing class.

• Explain the following passage: “When a powerful state is necessary to protect a given class system, the state itself can be capable of acting against upper-class hegemony.”

“The Revenue Problem”, The Economist, February 13, 2003

• Which are the two poorest countries in the region? Which country is the richest?

• What has been Enrique Bolanos’ approach to raising tax revenue? Officials say that that proportion of “professionals” are tax dodgers?

• Why do people actively engage in tax avoidance?

• How do porous, inefficient tax systems affect a nation’s attempt at to nurture economic growth?

• What is a nation’s “tax yield”? Which country has the lowest and which the highest tax yield? How do these numbers compare to Mexico, Brazil and Haiti?

• How does the “black economy” (informal economy) affect the tax yield?

• How is Costa Rica attempting to increase it’s tax yield?

Nation analysis: Example of Mexico:

1. Intro.: Start with overview of country/issue plus some current statistics.

1999  2000  2001  2002 

GDP per head ($ at PPP) 8,322 8,939 8,986 9,040

GDP (% real change pa) 3.74 6.57 -0.31 0.90

Government consumption (% of GDP)

11.01 11.09 11.77 11.80

Budget balance (% of GDP) -1.15 -1.10 -0.69 -1.17

Consumer prices (% change pa; ave) 16.59 9.49 6.37 5.03

Public debt (% of GDP) 21.87 20.74 20.05 22.77

Labor costs per hour (USD) 1.26 1.57 1.74 1.79

Recorded unemployment (%) 2.51 2.22 2.46 2.70

Current-account balance/GDP -2.91 -3.06 -2.84 -2.20

Foreign-exchange reserves (m$) 31,782 35,509 44,741 50,594

Recent Mexican Economic Data: 1999 - 2002

2. History … be brief.

- philosophical basis (prevailing norm)

- identify principal institutions in the social, political and economic spheres

- discuss notable working rules of these institutions

3. Methodology: Explicitly state your comparor’s norm … contrast with prevailing norm. Define your performance criteria, consistent with your comparor’s norm, and provide the data on your chosen country/issue and your benchmark country (importance: you can not evaluate in a vacuum)

4. Behavior/Analysis of economy (recent)

5. Evaluation from point of view of your performance criteria…benchmark country for comparison.

6. Conclusion

- what can you now say about this country/issue?

- do some forecasting: where are things going from here?

7. Footnote/Endnotes

Mexican Inflation in Comparison to Argentina=s

Year Mexico (Inflation)

Mexico (Percent

change from previous

year)

Argentina (Inflation)

Argentina (Percent

change from previous

year)1988 114.3 ---- 333.3 ----

1989 20.1 -782.41 3,084.60 825.47

1990 26.6 32.34 2,315.50 -24.93

1991 22.7 -14.66 171.7 -92.58

1992 15.5 -31.72 24.9 -85.5

1993 9.7 -37.42 10.6 -57.43

1994 6.9 -28.87 4.2 -60.38

1995 35 407.25 3.4 -19.05

1996 34.4 -1.71 0.2 -94.12

1997 20.6 -40.12 0.5 150

1998 15.9 -22.82 0.9 80

1999 16.6 4.4 -1.2 -233.33

2000 10.5 -36.75 0.5 142.67

Mexican Per Capita Gross Domestic Product (GDP) in Comparison to Argentina's (1990 U.S. Dollars)

Year Mexico (per capita

GDP)

Mexico (Percent

change from previous

year)

Argentina (per capita

GDP)

Argentina (Percent

change from previous

year)

1988 3027 ---- 5274.1 ----

1989 3095.4 2.26 4842.8 -8.18

1990 3195.5 3.23 4710.4 -2.73

1991 3268.3 2.28 5127.5 8.85

1992 3327.1 1.8 5579.4 8.81

1993 3325 -0.06 5847.7 4.81

1994 3415.1 2.71 6259 7.03

1995 3138.4 -8.1 5896.4 -5.79

1996 3253.6 3.67 6084.9 3.2

1997 3430.4 5.43 6512.4 7.03

1998 3536.7 3.1 6668.7 2.4

1999 3625.2 2.5 6395.3 -4.1

  Mexican Reported Unemployment in Comparison to Argentina=s

Year Mexico (Unemployment)

Mexico (Percent change from

previous year)

Argentina (Unemployment)

Argentina (Percent change from previous

year)

1988 3.5 ---- 6.3 ----

1989 2.9 -17.14 7.6 20.63

1990 2.7 -6.9 7.5 -1.32

1991 2.7 0 6.5 -13.33

1992 2.8 3.7 7 7.69

1993 3.4 21.43 9.6 37.14

1994 3.7 8.82 11.5 19.79

1995 6.2 67.57 17.5 52.17

1996 5.5 -11.29 17.2 -1.71

1997 3.9 -29.09 14.9 -13.37

1998 2.6 -33.3 12 -19.46

1999 2.6 0 15 25

2000 2.2 (est.) -15.4 13.9 (est.) -7.33

Mexico (United Mexican States)

• 100,350,000 people.

• Size: about three times the size of Texas.

• Capital: Mexico City … 8.5 million people.

• Ethnic makeup: 60% mestizo, 30% amarindian, 9% white, 1% others.

• Much of Mexico's territory is vulnerable to earthquakes and volcanic activity. In 1943, for example, a cornfield in one of Mexico's richest agricultural zones sprouted a volcano instead of maize. In 1982, a severe volcanic eruption in the south took several hundred lives, destroyed thousands of head of livestock, and buried crops under tons of ash. Thousands of people died when a series of earthquakes struck Mexico City in 1985.• Mexico is a nation of climatic extremes. Much-needed rains often fall so hard that most of the water runs off before it can be absorbed by the soil. When rains fail to materialize, crops die in the fields. The harsh face of the land, the unavailability of water, and erosion limit the agricultural potential of Mexico. Only 10 to 15 percent of Mexico's land can be planted with crops.

• Mexico's central region has the best crop-land. It was here that the Aztecs built their capital city, the foundations of which lie beneath the current Mexican capital, Mexico City.

• For decades, Mexico City has acted as a magnet for rural poor who have given up attempts to eke out a living from the soil. - The size and location of Mexico City have spawned awesome problems (the worst smog in the Western Hemisphere, traffic congestion is among the worst in the world, essential public services—including the provision of drinkable water, electricity, and sewers—have failed to keep pace with the

city's growth in population). • Mass communication has had an incalculable impact on culture.

- Television commercials primarily use models who are ethnically European in appearance—preferably white, blue-eyed, and blonde. As if in defiance of the overwhelmingly mestizo character of the population (success has become associated with light skin).

- Television, however, has helped to educate the illiterate: Some Mexican soap operas, for instance, incorporate

educational materials.

Literacy is portrayed as being essential to one's success and well-being.

• Compadrazgo ("co-godparenthood" or "sponsorship") is found at all levels of Mexican society and in both rural and urban areas.

- It is a device for building economic and social alliances that are more enduring than simple friendship. Furthermore, it

has a religious dimension as well as a secular, or everyday, application (informal rules of society).

- The chaos of city life, the hundreds of thousands of migrants uprooted from rural settings, and the sense of isolation and alienation common to city dwellers the world over are in part eased by the Hispanic institution of compadrazgo.

- Compadrazgo performs many functions, including providing assistance from the more powerful to the less powerful and, reciprocally, providing homage from the less powerful to the more powerful (reaches across class lines and knits the various strands of Mexican society together).

• As Mexico City has sprawled ever wider across the landscape, multitudes of new neighborhoods have been created. Many are the result of well-planned land seizures, orchestrated by groups of people attracted by the promise of the city.

- Technically, such land seizures are illegal; and a primary goal of the colonos (inhabitants of these low-income

communities) is legitimization and consequent community participation.

- Beginning in the 1970s, colonos pursued their demands for legitimization through protest movements and demonstrations, some of which revealed a surprising degree of radicalism.

- In response, the Mexican government adopted a two-track policy: It selectively repressed the best-organized and most radical groups of colonos, and it tried to co-opt the

remainder through negotiation. In the early 1980s, the government created "Citizen Representation" bodies, official channels within Mexico City through which colonos could participate.

The Border:

• Driven by poverty, unemployment and lack of opportunity many Mexicans have chosen the United States as the place to improve their lives.

• During WWII the presidents of both nations agreed to allow Mexican workers, called braceros, to enter the US as agricultural workers.

• Regardless, each year hundreds of thousands of undocumented Mexicans illegally cross the border in search of work (estimated at 4 to 6 million at any given time).

• For the Mexican government this is a blessing since such mass emigration is a sociopolitical safety valve and results in an inflow of dollars sent home by workers.

• Still, the US has attempted to stem the flow by negotiating treaties so that US companies and Mexican states along the border would profit from the creation of assembly plants (maquiladoras).

• Low wages and lax labor and environmental law enforcement has resulted in US firms gaining profits while the Mexican government reaps the benefits of employment and tax dollars.

Mexico’s Stability:

• Depends on the ability of the ruling elite to maintain a state of relative equilibrium among the multiplicity of interests and demand in the nation.

• Process characterized by bargaining among elites with various views of politics, social injustice, economic policy, and the conduct of foreign relations.

• The 1910 Revolution (1910-1917) resulted in the Mexican Constitution: A remarkable document in that it covers not only political rights but economic rights as well (e.g. 8-hour work day, minimum wage, 6-week paid leave for pregnant women, etc.

• Unfortunately, many of the provisions of the 1917 Constitution have yet to be achieved.

• Indian “problem” … they have long endured the unequal practices of a ruling white and Mestizo elite.

• Land reform: focus of struggle and occasion for serious human rights abuses.

• Even today, paramilitary bands and local police controlled by political bosses or landowners routinely threaten an/or kill peasant activists. The further south you go in the country, the more acute this problem (Chiapas).

• Institutional Revolutionary Party (PRI) controlled the federal government from 1929 to 2000; and set policy and controlled all levers of political power.

• Paternalistic and all-powerful, the state controlled the bureaucracies that directed the labor unions (powerful), peasant organizations, student groups, and virtually every other dimension of organized society.

• Even though the PRI lost the presidency in 2000, it remains the most powerful political party.

• The PRI lost power because a series of economic crises alienated the upwardly mobile middle-class.

• In 2000 Vicente Fox headed a coalition of parties that adopted the name Alliance for Change and promised Mexico’s electorate “Revolution of Hope”… he promised to be a “citizen president”.

Economic Crisis:

• In the 1970’s the PRI undertook economic policies designed to foster rapid and sustained economic growth (import substitution).

• Borrowed heavily to fund and achieved economic growth of 8%.

• Backed by its vast deposits of petroleum, the PRI recklessly borrowed to expand its economic infrastructure.

• Petroleum prices plunged in 1981-82… debt crisis. By the end of 1982 40% of Mexico’s export earnings were devoured in interest payments on a debt of $80bil.

• IMF set as a condition for emergency funding a drastic reduction in state spending => layoffs, reduced spending on social welfare programs. Devastated the poor and reduced the standard of living of the middle class.

• In December 1994 the economy collapsed after the government could no longer sustain an overvalued peso.

• The peso fell 50% , while the stock market fell 38%. Ushered in another round of public austerity (Pres. Zedillo) and was the final ingredient in bringing down the PRI.

• US engineered a bailout by backing (attached loan guarantees) a new issuance of Mexican government bonds.

• NAFTA: hope was that it would shore up the Mexican economy and generate jobs. It has for Mexico so that now Mexico is the second largest trading partner of the US. A new trade agreement between Mexico and the EU signed in 2000.

• Resulted in the globalization of Mexico.

• Analysts have noted that NAFTA has contributed to a trend toward more representative government and that globalization has undercut the state-centered regime of the PRI.

• Still, there are far to many Mexicans who live below the poverty level. Of the 40 million poor, 18 million are characterized as living in “extreme poverty”.

• Income distribution is skewed with the richest 20% in control of 58% of the nation’s wealth while the poorest 20% control only 4%.

#3 The Export Economics: Coffee, Bananas, and Social Structure, 1850 – 1930

• In the late 19th century economic globalization began in earnest. What role did Central America emerge to play in this phenomena?

• Was there an international conspiracy to bring Central America into the international economy in as a dependent exporter of coffee and bananas?

• What impact did the opening of the Panama Canal in 1914 have on Central America? What impact did the beginning of WWI in the same year have on Central America?

• Does neoclassical economics do a good job in explaining the actual gains made by Central America by participation in the world economy?

• What are the three connections articulated by your author that govern the possibility of economic dynamism?

• What was the “distinctive” social context in which the coffee economy of Costa Rica developed?

• During the 1870s a sea captain by the name of Lorenzo Baker threw some green bananas on his ship bound from Port Antonio, Jamaica to Boston. The bananas were ripe when he landed and he sold them all in a matter of minutes at a handsome profit. Thus the banana industry was born. Sometime later he met Minor Cooper Keith who ran the Atlantic railway in Costa Rica. What did these two men establish in 1899?

• Did this help Costa Rica to develop?

• How was the organization of the coffee industry different between Costa Rica and Guatemala?

• How would you characterize the “labor mobilization system” of Guatemala? What were the important “pillars” that this system rested upon?

• How do the foreign banana companies enter the Guatemala story?

• Did the coffee industry in El Salvador develop like that in Guatemala?

• During this period what was going on in Nicaragua?

• And what about Honduras?

• How did political power become organized in the context of the strong growth in the export industries for ….

• Costa Rica?

• Guatemala?

• El Salvador… the “fourteen families”?

• Nicaragua… Jose Santos Zelaya… Theodore Roosevelt’s “big stick” policy?

• Honduras?

• Why didn’t dynamic export production growth create materially progressive capitalism in Central America?

Guatemala … Peoples in Conflict

• Population: 12,640,000

• Size: about the size of Tennessee

• Capital: Guatemala City (2,205,000)

• Currency: Quetzal

• Ethnic relations between the descendants of Maya Indians, who comprise 44 percent of Guatemala's population, and whites and Ladinos (Hispanicize Indians) have always been unfriendly and have contributed significantly to the nation's turbulent history.

• The process of domination was accelerated between 1870 and 1920, as Guatemala's entry into world markets hungry for tropical produce such as coffee resulted in the purchase or extensive seizures of land from Indians.

• Denied sufficient lands of their own, Indians were forced onto the expanding plantations as debt peons. Others were forced to labor as seasonal workers on coastal plantations; many died there because of the sharp climatic differences.

• Assaulted by the Ladino world, highland Indians withdrew into their own culture and built social barriers between themselves and the changing world outside their villages. (These barriers persist today)

• For the Guatemalan governments that have thought in terms of economic progress and national unity, the Indians have always presented a problem.

• Traditionally, the white world has perceived them as a burden. "Backward," "custom-bound," "superstitious," "uneducated” and “inassimilable" are terms used to describe the Indians.

• Indian "backwardness" is best explained by elite policies calculated to keep Indians subordinate: Social, political, and economic deprivations have consistently and consciously been utilized by governments anxious to maintain the Indian in an inferior status.

• However, between 1945 and 1954, however, there was a period of remarkable social reform in Guatemala…

• Before the reforms were cut short by the resistance of land-owners, factions within the military, and a U.S. Central Intelligence Agency-sponsored invasion, Guatemalan governments made a concerted effort to integrate the Indian into national life.

• At the time some Indians who lived in close proximity to large urban centers such as the capital, Guatemala City, learned that their vote had the power to effect changes to their benefit.

• Since this time Indians have on occasion challenged state policies that they have considered inequitable and repressive. But if they become too insistent on change, threaten violence or societal upheaval, or support and/or join guerrilla groups, government repression is usually swift and merciless.

• Indigenous peoples in Guatemala have suffered most of the combat-related casualties and repeated abuses of their basic human rights and there remains a pervasive discrimination against Indians within ladino society.

• A civil war, which was to last for 36 years, developed in 1960. • Guatemala was plagued by violence, attributed both to left-wing insurgencies in rural areas and to armed forces' counterinsurgency operations.

• Led by youthful middle-class rebels, guerrillas gained strength because of several factors: the radical beliefs of some Roman Catholic priests in rural areas (liberation theology); the ability of the guerrillas to mobilize Indians for the first time; and the "demonstration effect" of events elsewhere in Central America.

• Radical clergy increased the recruitment of Indians into theguerrilla forces by suggesting that revolution was an acceptable path to social justice.

• According to the Latin American Regional Report for Mexico and Central America, government massacres of guerrillas and their actual or suspected supporters were frequent and "characterized by clinical savagery."

• To counterbalance the violence, once guerrillas were cleared from an area, the government implemented an "Aid Program to Areas in Conflict." Credit was offered to small farmers to boost food production in order to meet local demand, and displaced and jobless people were enrolled in food-for-work units to build roads or other public projects.

• By the mid-1980s, most of the guerrillas' military organizations had been destroyed… although the civil war simmered for almost another decade.

• There was some hope for improvement in 1993, in the wake of the ouster of President Jorge Serrano, whose attempt to emulate the "self-coup" of Peru's Alberto Fujimori failed. Guatemala's next president, Ramiro de Leon Carpio, was a human-rights activist who was sharply critical of security forces in their war against the guerrillas of the Guatemalan National Revolutionary Unity (URNG).

• In July 1993, de Leon announced a new set of proposals to bring to an end the decades of bloodshed that had resulted in at least 140,000 deaths.

• Those proposals were the basis for the realization of a peace agreement worked out under the auspices of the United Nations in December 1996. But the underlying causes of the violence still must be addressed (e.g. 70 percent of the Maya Indians still live in poverty, and more than 80 percent are illiterate).

• Although the fighting has ended, fear persists.

The Economy…

• As you might imagine, a 36 year civil war has disrupted and drained the Guatemalan economy.

• The agricultural sector accounts for about one-fourth of GDP, two-thirds of exports, and half of the labor force. Coffee, sugar, and bananas are the main products.

• Former President Arzu (1996-2000) worked to implement a program of economic liberalization and political modernization.

• President Portillo has continued the liberalization program but with more sporadic results.

• The government has attempted to revitalize the economy by fostering the diversification and expansion of nontraditional exports, and free trade zones have been established to encourage the expansion and decentralization of manufacturing. The collection of personal income taxes has improved significantly; the government, however, continues to rely upon revenue from other tax sources, such as customs duties, sales taxes, and excises on liquor and tobacco.

• The distribution of income remains highly unequal, with perhaps 75% of the population below the poverty line. Ongoing challenges include increasing the government revenues, negotiating further assistance from international donors, upgrading both government and private financial operations, and narrowing the trade deficit.

• Despite the fact that the historic 1996 signing of the peace accords removed a major obstacle to foreign investment, numerous corruption scandals associated with the Portillo administration have dampened investor confidence.

• In 1998, Hurricane Mitch caused relatively little damage to Guatemala compared to its neighbors.

• Guatemala is a major transit country for cocaine and heroin; minor producer of illicit opium poppy and cannabis for mostly domestic consumption; proximity to Mexico makes Guatemala a major staging area for drugs (cocaine and heroin shipments); money laundering is a serious problem; corruption is endemic. • Guatemalan squatters continue to settle in Belize border region creating tension with Belize; OAS brokered an agreement in 2002 creating small adjustment to the land boundary between the two counties, but this agreement was not brought to popular referendum leaving Guatemalan claim to southern half of Belize intact.

“Secretary of State Colin L. Powell met Monday afternoon, February 11, 2002, with Guatemalan President Alfonso Portillo. During the meeting, Secretary Powell expressed appreciation for the counter-terrorism measures undertaken by the Guatemalan Government, including its public statements, its ratification of key international conventions and its passage of anti-money laundering legislation. Secretary Powell also congratulated President Portillo for the progress made in reducing tensions on the Belize border and for his determination to resolve the issue.”

• On December 28, 2003, in a runoff election, the centrist mayor of Guatemala City, Oscar Berger, won the presidency with 54% of the vote. Berger defeated the former dictator, Efraín Ríos Montt, who ran a military government from 1982-1983.

El Salvador Learns to Love the Greenback

The Economist, Sept. 26, 2002

• What is “dollarisation”?

• Do the authors of the article think that

dollarisation makes sense for El Salvador? Why?

• Have there been any benefits to dollarisation realized so far?

• Has there been any negative consequences experienced by dollarisation? Does the article suggest that this will pose a serious problem?

• If this monetary transition proves successful, what does the article suggest may happen next?

Central BankPrimero Commercial Bank

Assets Liabilities   Assets Liabilities

Reserves:$1,000,000,000

Reserves:c6,000,000,000

Reserves: $1,000,000

Checking deposits:c6,000,000

   

   

   

Carlos' Checking Account at Primero Commercial Bank - PPP exchange rate set

Assets Liabilities   at 6 colones = $1

c6,000 $1,000

 

 

 

Dollarization example… in this example the purchasing power parity exchange rate is set at 6 colones to the dollar. It is determined that there are 6 billion colones in circulation. The Federal Reserve arranges to ship El Salvador $1 billion dollars in newly minted bills and coins. Carlos is informed of the new monetary system through the media and given so much time to exchange the colones in his pocket. He is also told that his bank account will be converted to dollars on a certain date at the 6 to 1 rate.

Central Bank Commercial Bank

Assets Liabilities   Assets Liabilities  

Reserves:$1,000,000,000

Reserves:c6,000,000,000

Reserves:$1,000,000

Checking deposits:c6,000,000

-$100 -c600 -$100 -c600

$999,999,900 c5,999,999,400 $999,900 c5,999,400

   

Carlos' Account at Commercial Bank

Assets Liabilities  

c6,000 $1,000

-c600 -$100

c5,400 $900

 

Carlos decides that he wants to withdraw 600 colones to buy something. Stores are already posting prices in both colones and dollars and accepting either as payment for purchases. Carlos goes to the bank and the teller hands him $100 instead of c600. Carlos is surprised yet knows that the $100 buys c600 worth of merchandise. Carlos makes his purchase at the store and goes his merry way. In time colones become less common and dollars the standard unit of accounting, store of value and medium of exchange. At the end of the transition period… 3 years in the case of El Salvador… the government announces that colones will no longer be honored effective 12/31/2003 (stopped printing colones 1/1/2001).

#4 Economic Decline, War, and the Ascent of the State, 1930 to the 1950s

• What important lesson was learned in the Great Depression?

• What nation was hit the hardest by the Depression?

• What was the general political reaction to the Depression? And in particular…

- in El Salvador?

- in Guatemala?

- in Honduras?

- in Nicaragua?

- in Costa Rica?

• Note: The US disapproved of the first four governments despite their strong anti-communist stance. This would change after the Cold War heated up in the post-WWII era.

• What was President Franklin Roosevelt's “Good Neighbor” foreign policy?

• Leaders of the time… Martinez, Ubico and Somoza were sympathizers with Italian fascism: strong central government, nationalism, xenophobia, Corporative State (state directed economic activity and control of unions).

• Reform along fascist lines meant that the power of the state was enhanced and political institutions linked to the upper reaches of civil society. This translated into control or weakening of political parties and competitive elections.

• Note passage on page 122: “If the state can successfully use violence to suppress the majority of the population, and if it can regulate economic life well enough to maintain the incomes of the propertied elite, it is an institution that potentially could be used against the privileged who it was created to protect.” This potential began to be realized in what decade?

• Most governments got themselves into financial trouble during this time and experimented with a new approach to deal with this problem. What was this approach and how did it help?

• In 1939 Germany was the biggest European importer of coffee from Central America. When the US entered WWII in late 1941, who’s side did the Central America countries align themselves with? Why?

• Note… it was in the 1940s that rapid emigration from the country to the cities began in the region. It also marks the beginning of a significant white-collar, middle-class (though still politically unorganized and weak).

• 1944 marked the end of the war and the establishment of certain factors that would dominate the Central American landscape until the 1990s.

- Cold War: US… large scale foreign aid to friendly (i.e. anticommunist) regimes.

- Encouragement of economic development: UN Economic Commission for Latin America (ECLA or CEPAL); the World Bank. Based on belief at time that progress is

fundamentally a technical rather than social process.

• Was the period after 1944 economically better for Central America?

• Which country had the greatest industrial growth in the decade after WWII?

• What did Juan Jose Arevalo do once he became president of Guatemala in 1946? What happened once he addressed land reform?

• Passage from book… “ One of the… accomplishments of Armas’s (president after Arevalo) presidency was <that> in exchange for restoring lands lost to the reform, the Guatemalan Government imposed a 30 % tax on United Fruit Company profits….,and even though transfer prices made such calculations easily manipulated, it was much more tax than the company had ever had to pay…”

• In Costa Rica, what happened when the ambitious reforms of the Calderon administration were finally opposed by the Social Democratic Party under Jose Figueres?

• How did the US react to this?

• Note: Galvez in Honduras began a program to diversify economy to enhance independence from the fruit companies.

• Note: In Nicaragua Somoza continued increasing his personal fortune through his talents as a gifted and unscrupulous politician. Still, in 1956 the elder Somoza was assassinated in Leon and there followed a relatively smooth transition to his son: Anastacio Somoza Debayle (younger of two sons and trained at West Point).

• Note: In the 25 years between 1930 and 1955 there was a shift in the pattern of power in Central America. Away from economic structures defining politics to a pattern where political developments resulted in changes in the state and consequently the economy. This was the result of…

1. Reaction of propertied classes to the Depression.

2. Changes in production and demography caused an emergence of new political constituencies.

3. External concept of economic development… static and neoclassical. Not only US but UN, World Bank, etc.

4. The Cold War: Central American became part of the front line to the North Americans.

A Little Bit of the British West Indies…

- slightly smaller than Massachusetts -

• Parliamentary democracy within the British Commonwealth Sovereign: Queen Elizabeth II (1952), Governor-General: Sir Colville Young (1993), Prime Minister: Said Musa (reelected to a second term in March 2003 ).

• Population: 272,945, Capital: Belmopan, 8,700.

• Ethnicity: mestizo 48.7%, Creole 24.9%, Maya 10.6%, Garifuna 6.1%, other 9.7%.

• Exports: sugar, bananas, citrus, clothing, fish products, molasses, wood.

• Monetary unit: Belize dollar… which has been pegged to the U.S. dollar at a rate of Bz.$2.00 to U.S.$1.00 since May 1976.

• The Mayan civilization spread into the area of Belize between 1500 B.C. and A.D. 300 and flourished until about 1200. Several major archeological sites—notably Caracol, Lamanai, Lubaantun, Altun Ha, and Xunantunich—reflect the advanced civilization and much denser population of that period.

• European contact began in 1502 when Columbus sailed along the coast. The first recorded European settlement was begun by shipwrecked English seamen in 1638.

• Over the next 150 years, more English settlements were established. This period was also marked by piracy, indiscriminate logging, and sporadic attacks by Indians and neighboring Spanish settlements. • Many who settled in Belize in the late 1630s were English woodcutters. The loggers were interested primarily in dye-woods, which, in the days before chemical dyes, were essential to British textile industries.• As a British colony (called British Honduras), Belize enjoyed relative prosperity as an important entrepot, or storage depot for merchandise, until the completion of the Panama Railway in 1855. With the opening of a rail route to the Pacific, commerce shifted south, away from Caribbean ports. Belize entered an economic tailspin (from which it has never entirely recovered).• Economically depressed, its population exposed to the ravages of yellow fever, malaria, and dengue (a tropical fever), Belize was once described by British novelist Aldous Huxley in the following terms: "If the world had ends, Belize would be one of them." • Living conditions improved markedly by the 1950s, and the colony began to move toward independence from Great Britain.

• Although self-governing by 1964, Belize did not become fully independent until 1981, because of Guatemalan threatsto invade.• Culturally, Belize is British with Caribbean overtones. English common law is practiced in the courts, and politics are patterned on the English parliamentary system. Thirty percent of the people are Protestants. The Belizeans are primarily working-class poor and middle-class shopkeepers and merchants. There is no great difference between the well-to-do and the poor in Belize, and few people fall below the absolute poverty line.• Thirty-one percent of the population are Creole (African and English mixture), 6 per-cent Garifuna (black and Indian mixture).

- The Garifuna originally inhabited the Caribbean island of St. Vincent. In the eighteenth century, they joined with

native Indians in an uprising against the English authorities. As punishment, virtually all the Garifuna were deported to Belize.• Despite a pervasive myth of racial democracy in Belize, discrimination exists. Belize is not a harmonious, multiethnic is-land in a sea of violence.

• Guatemala has long-standing territorial claims to Belize. During the long Guatemalan Civil War perhaps as many as 40,000 Latin American refugees fled the fighting to the relative safety of Belize. • Spanish is now the primary language of a significant percentage of the population, and some Belizeans are concerned about the "Hispanicization" of the country.• As with Guatemala, Belize is major transshipment point for cocaine; small-scale illicit producer of cannabis for the international drug trade with some money-laundering activity related to offshore sector.• With the new millennium, Belize has increasingly turned its attention to the impact of globalization. Concern was expressed by the government about job security and the need for education and training in the skills necessary to compete in a global marketplace.• As a result greater emphasis is placed on education and health care in public policy decisions.• From 1997 through 2003, tourism averaged 20.2% of Gross Domestic Product (GDP).• The US, Belize's main trading partner, is assisting in efforts to reduce dependency on sugar with an agricultural diversification program.

#5 Economic Dynamism and Structural Transformation:

The 1950s to the early 1980s

• Explosive currents that came together to create a maelstrom:

1. Development of an industrial, urban core

2. Marginalization of the majority of citizens

3. Growth of state power

4. Expansion and transformation of export sector.

• Note: “… the particular pattern of economic growth, not stagnation and decline, was the genesis of subsequent crises.”

• From about 1950 to the early 1970s regional economic growth averaged around 6% per year due to considerable export diversification, agricultural modernization and industrialization.

…yet economic success led to severe social and political failure.

• What three new agricultural goods become central to export diversification?

• Embargo against Cuba in the early 60’s diverted demand and preferences to Central America.

• Cotton, sugar and beef production had complex, capital-intensive forward-linked processing activities which led to significant investment.

• Development of new agricultural industries put a strain on the poorly developed financial systems => led to banks and bankers becoming more important in systems.

• UFC became United Brands in 1970 and sold off Guatemalan operations to Del Monte.

• What was the “Green Revolution” and who benefited from it?

• Note: Despite this, food imports rose in region during this period. There was a rise in general hunger due to domestic relations of export production and the resulting concentration of income.

• Due to rising productivity in agriculture, chronic labor shortages came to and end in the region.

• This put pressure on rural people to migrate to cities.

• What was the 1969 “Soccer War” between Honduras and El Salvador about?

• Therefore, the success of capitalist agricultural development led to greater inequality, increasing poverty and laid the foundation for political instability.

• The growing middle class began to entertain the idea that the existing land tenure pattern was retarding economic growth of the urban industrial activities => began to support land reform.

• Between 1950-1963, the five Central American nations signed free grade agreements with each other creating a coordinated common market. CACM lasted 10 years. Honduras withdrew after the Soccer War and CACM went into slow decline.

• Supported by CEPAL, the nations moved firmly to inaugurated the set of policies associated with import substitution industrialization. What does this policy set entail?

• Note: The common tariff structure was not as high as in other Latin American cases… domestic resistance to raising tariffs. Yet final tariff structure gave considerable protection to domestic consumer good producers.

• ISI plan in Central America went beyond to concept of a common market. Countries agreed to establish some integrated industries. Factories considered essential for regional industrial development. Done to attain economies to scale in the capital goods industries.

• CACM led to considerable multinational corporate investment (mainly US) in manufacturing in the region for the first time… in the form of direct investment (a plant in any country could send goods to the other four duty free).

• Lack of competition and low utilization resulted in most factories being high cost operations. Produced goods only distributed in regional protected markets.

• Note: Cuban revolution led the US to support the founding of the Inter-American Development Bank (IDB) around 1960.

- Supports economic and social development and regional integration in Latin America and the Caribbean. It does so mainly through lending to public institutions, but it also funds some private projects, typically in infrastructure and capital markets development. Headquarters in Washington.

• What was the Alliance for Progress and why was it initiated by the North Americans?

• At this point Weaver breaks productive activity into four sectors to more easily support economic analysis: a modern urban sector, export agricultural sector, a competitive sector and a state sector.

• Urban sector: core activity was manufacturing with production processes characterized by capital-intensive technologies, high labor productivity and well organized labor forces. In place by early 1970s and supported by ISI policies. An important source of economic growth in the 70’s and 80’s.

• Agricultural sector: Characterized by concentration of ownership, technological sophistication and a major source of social power.

- - Consolidation of past gains yet still highly dependent on dynamics of foreign markets.

- Import supply of foreign exchange needed to pay of imports (capital goods, intermediate inputs, fuels and chemical fertilizers).

- Sector most polarized along class lines.

• Competitive sector: small, low-profit, and low wage enterprises employing rudimentary, labor-intensive production technologies.

- Across the economy, important in the production of wage goods.

- Often referred to as the “informal” sector. Employs the majority of population and extremely heterogeneous (spans agriculture, industry and serviced in both urban and rural areas)

- Expands and contracts passively in response to the general economy.

- Characterized by high turnover of employees and considerable labor mobility. Constituted pool of reserve labor that keeps downward pressure on wage rates in all sectors.

- Unregulated and unmonitored.

Note: The low-wage, low-productivity of the competitive and agricultural sectors contrasted with the higher-wage, high-productivity urban sector, generated increasing wealth and economic growth at one end of the social pole and poverty and stagnation at the other.

• State sector: Stepped into this social chasm to attempt to ameliorate this capitalist contraction.

- State became an important employer, regulated more by availability of positions rather than by wage rates.

- Both the urban and state sectors came to generate a modern middle class across the region.

- State evolved to play the role of economic and social stabilizer. Done through expenditure policy: [1] to encourage economic growth and [2] to foster political legitimacy and social stability.

- Encouraged economic growth by raising profitability and stimulating production through ISI initiatives. Often

accomplished by taking on infrastructure projects (e.g. roads, power, communications) and subsidized imports and credit, provision of education, favorable tax treatment and control of labor.

- Political legitimacy and social stability accomplished through negotiating trade agreements (CACM), direct government purchases, setting tariffs and quotas, control currency and reduce or suppress disaffection and political unrest.

- Suppression of disaffection and political unrest can be accomplished though several means [1] allocate state resources to alleviate the material hardship of agitating groups (often a co-opting strategy) [2] violence and terror (US foreign aid during Cold War was critically important in making direct repression feasible).

- In the context of the rising fiscal crisis that swept across the region as ISI opportunities were spent led to

governments focusing [1] on the politically more powerful middle class and using [2] to quell the marginalized masses and worker organizations that could not be co-opted.

- Why couldn’t the fiscal crisis be resolved though taxing the propertied classes?

- So, what did they do?...

- 1968: San Jose Protocol… 5 nations agreed to increase tariffs by 30%. This would raise both protection and tax revenue.

- States resorted to deficit financing. Domestic saving limited, money creation caused inflation… so they turned to international credit markets.

- What are the two economic “gaps” this created during the 70’s and early 80’s?

- What happened when Mexico declared a moratorium on debt payments in 1982?

• Note: When the Nicaraguan government borrowed money internationally, and the majority of it went into the pocket of Somoza and his cronies, the debt is considered to belong to Nicaragua as a nation, which means that the “nation” is supposed to repay it.

- This technicality was completely ignored until the 1990s and early 2000s and led in the 1970s and 1980s to the

entrenched trend of transferring income from the poorest to the richest within and among nations.

How to Trade Up: Can trade negotiations with the United States help Central America to Unite?

- The Economist, Feb. 13, 2003 –

• What two countries in the region have not been part of the Central American Common Market (1960) nor the current proposed CAFTA?

• The US exports $9 billion in goods each year to Central America yet this accounts for less than 1% of total US exports => region not important to US trade or economy.

• Therefore, why does the US want CAFTA?

• Does Central America have a high tariff structure?

• What benefits does Central America hope to receive from CAFTA?

• Why do the five Central American countries desire greater cooperation between themselves?

Honduras: Republic of Honduras

- Slightly larger than Tennessee -

• President: Ricardo Maduro (2002).

• Capital: Tegucigalpa, 1,436,000 (metro. area).

• Ethnicity/race: mestizo (mixed Indian and European) 90%, Indian 7%, black 2%, white 1% .

• Currency: 1 lempira (L) = 100 centavos.

• GDP: purchasing power parity—$ 16.29 billion: GDP—real growth rate: 2.5%; GDP—per capita: purchasing power parity—$2,500.

• Inflation rate (consumer prices): 7.7%: Unemployment: 28%.

• Exports: $1.3 billion (f.o.b., 2002 est.): coffee, bananas, shrimp, lobster, meat; zinc, lumber (2000).

• Imports: $2.7 billion (f.o.b., 2002 est.): machinery and transport equipment, industrial raw materials, chemical products, fuels, foodstuffs (2000).

• In political terms, Honduras resembles much of the rest of Central America. Frequent changes of government, numerous constitutions, authoritarian leaders, wide-spread corruption, and an inability to solve basic problems are common to Honduras and to the region.

• A historian of Honduras once wrote that his country's history could be "written in a tear.“

• In terms of social policy, however, Honduras stands somewhat apart from its neighbors. It was slower to modernize, there were no great extremes of wealth between landowners and the rest of the population, and society appeared more paternalistic and less exploitive than was the case in other Central American states.

• Honduras lacks the sharp social divisions that helped to plunge Nicaragua, El Salvador, and Guatemala into rebellion and civil war. And Honduran governments have seemed somewhat more responsive to demands for change. Still, Honduras is a poor country. Its people have serious problems—widespread illiteracy, malnutrition, and inadequate health care.

• In 1962 and 1975, agrarian-reform laws were passed and put into effect with relative success. The Honduran government, with the aid of peasant organizations and organized labor, was able to resettle 30,000 families on their own land. Today, two thirds of the people who use the land either own it or have the legal right to its use.

• The state has often shown a paternalistic face rather than a brutal, repressive one.

• An alliance of the military and organized labor in the early 1970s produced a series of reforms in response to pressure from the less advantaged sectors of the population; in 1974, the military government developed a five-year plan to integrate the rural poor into the national economy and to increase social services in the area.

• Honduran campesinos, according to Central America Report, "have had a long and combative history of struggling for land rights." In 1987, hundreds of peasants were jailed as "terrorists" as a result of land invasions. Occupation of privately owned lands has become increasingly common in Honduras and reflects both population pressure on and land hunger of the peasantry.

• The nation's economy as a whole fared badly in the late 1980s, getting into debt like the rest of the region.

• In addition to internal problems, pressure has been put on Honduras by the International Monetary Fund. According to the Caribbean & Central America Report, the first phase of a reform program agreed to with the IMF succeeded in stabilizing the economy through devaluation of the lempira, public-spending cuts, and increased taxes.

• But economic growth declined, and international agencies urged a reduction in the number of state employees as well as an accelerated campaign to privatize state-owned enterprises.

• By 1992, following painful adjustments occasioned by the reforms of the government of President Rafael Callejas, the economy again showed signs of growth. Real gross domestic product reached 3.5 percent, and inflation was held in check. Still, unemployment remained a persistent problem; some agencies calculated that two thirds of the workforce lacked steady employment.

• In theory, despite the continuing violence in the region, basic freedoms in Honduras are still intact. The press is privately owned and free of government censorship. There is, however, a quietly expressed concern about offending the government, and self-censorship is considered prudent. Moreover, it is an accepted practice in Honduras for government ministries and other agencies to have journalists on their payrolls.

• In 1992, Honduras's three major workers' confederations convinced the private sector to raise the minimum wage by 13.7 percent, the third consecutive year of increases. Nevertheless, the minimum wage, which varies by occupation and location, is not adequate to provide a decent standard of living, especially in view of inflation.

• The government is also confronted with the problem of an increasing flow of rural poor into the cities. Employment opportunities in rural areas have declined as landowners have converted cropland into pasture for beef cattle. But the new migrants have discovered that Honduras's commercial and industrial sectors are deep in recession and cannot provide adequate jobs.

• Also in the early 1990s many of the 300,000 refugees from Nicaragua and El Salvador returned home. With political stability within these two regional neighbors there has been the elimination of a major source of violence in its border regions.

• From the mid-1980s to the mid-1990s, the most serious threat to civilian government came from the military. The United States' Central American policy boosted the prestige, status, and power of the Honduran military, which grew confident in its ability to forge the nation's destiny.

• With the end of the Contra-Sandinista armed struggle in Nicaragua, there was a dramatic decline in military assistance from the United States. This allowed President Reina to assert civilian control over the military establishment in the mid-90s.

• In 1998, just as the Honduran economy was beginning to recover from economic setbacks occasioned by turmoil in the influential Asian financial markets. Hurricane Mitch wreaked havoc on the nation's infrastructure. Roads, bridges, schools, clinics, and homes were destroyed, and thousands of lives were lost. Recovery from this natural disaster will be prolonged and costly.

• Prior to Hurricane Mitch in the fall of 1998, Honduras had been pursuing a moderate economic reform program and had posted strong annual growth numbers. The storm has dramatically changed economic forecasts for Honduras, one of the poorest countries in Central America and the hardest hit by Mitch. Honduras sustained approximately $3 billion in damages. • Hardest hit was the all-important agricultural sector, which is responsible for the majority of exports. Significant aid has helped to stabilize the country.

• In addition, the Paris Club and bilateral creditors have offered substantial debt relief, and Tegucigalpa is currently under consideration for inclusion in the IMF-World Bank Highly Indebted Poor Countries Initiative (HIPC). Additional financing will be needed to restore the economy to its pre-Mitch level.

On Wednesday, March 24 2004, the president of the Mexican United States, Vicente Fox, and his wife Marta Sahagun visited Honduras on the first State visit in 38 years of a Mexican president

#6 Economic Dynamism and Political Decay, the 1950s to the Early 1980s.

• There were several important grass roots, social developments during the 1960 and early 70’s that fed the flames of civil strife.

[1] Pope John XXII preached on the social responsibility of the Church… led to the formation of “liberation theology”.

[2] With encouragement from the Vatican, Catholic priests and nuns became important catalysts of change among the rural and urban poor.

[3] Clergy helped them form cooperatives, organize community action projects and leagues, press authorities to redress grievances. In general to raise social consciousness and empower those marginalized.

[4] Brought the Church, clergy and peasants into direct opposition to the state; making them targets for brutal reprisals.

Note: The successors to Pope John have backed away from the social gospel and John Paul II has all but repudiated social and political Church activism.

• Guatemala moved into the 60’s with robust economic growth, a diversifying economy and a military government.

[1] Note the story of US involvement in Guatemala since the “liberation” of 1954… essentially, by the 1960s the US

government had become an important constituent of the military: what the US government thought mattered.

[2] While the US provided aid for civic action projects (roads, schools, health clinics) the military rooted itself in all social institutions.

[3] As the military became more bold and open, the opposition came to the conclusion that the electoral process was impotent and that reform was only possible through armed

struggle.

[4] Guerrilla groups formed as did right-wing vigilante terrorist groups in response… thus began the 36 year civil war (bloodiest period from 78 to 83) and the beginning of the “disappearances” in Latin America.

[5] You can read the details on pages 193 to 200.

• In terms of economic structural effects, the early years of the civil war saw the urban and rural propertied classes unify and close ranks.

• Almost any reform initiative came to be seen as an assault on property rights and the existing structure of privilege.

• As the military assumed more and more control, this group began to aspire to be the propertied classes’ partners rather than merely their instrument.

• As the situation spiraled downward, Jimmy Carter cut off military aid in the late 70s on the principled grounds of human rights violations. This created a gap between the North Americans and the Guatemalan military that was never fully closed by subsequent US administrations.

• Costa Rica had matured into a stable yet conservative nation since the 1948 civil war.

[1] Important development: the export agriculture elite feared the CACM would inhibit free trade and evolve into an ISI protectionist system, diverting resources away from their deployment in the export sector.

[2] As a result, Costa Rica withdrew from CACM negotiations.

[3] By the 60s the PLN (Partido Liberal Nacional) had developed its “general program”: a middle ground set of policies that embraced both an antioligarchical reformism and a strong anticommunism.

[4] Your book points out that this program’s similarity to the ideals of the Alliance For Progress was remarkable.

[5] Note that at this time both taxes and wages had become higher in Costa Rica than elsewhere in Central America… continues to be true today.

[6] Also note that Costa Rica’s income distribution was not very different than other Central American countries =>

the state worked hard to support accumulation by the propertied classes and had opted for social ameliorative measures over repression to maintain social stability.

[7] Finally, US foreign aid to Costa Rica was second only to Israel on a per capita basis (yet Costa Rica was not a US

stooge)

[7] Note: part of the way the government had maintained social stability was through building a democratic welfare state => public finances moved to borderline crisis mode.

• El Salvador…

• Partido Democratica Cristiana (PDC)… Jose Napoleon Duarte

• Series of events… Soccer War (67)… military lost the war… 125,000 El Salvadoran immigrants returned home causing social unrest… Honduran embargo hit Salvadoran exports and economy hard… political intrigue with General Molina stealing election from Duarte… coup led by dissident army officers (failed)… public protests begin… right-wing vigilante groups organized and become active… Church became active and was branded as an enemy (Archbishop Oscar Romero assassinated in 1979)… Frente Farabundo Marti para la Liberacion Nacional (FMLN… a leftist party) and Alianza Republicana Nacional (ARENA… right wing and associated with the death squads) formed… military divided… country constantly in state of internal siege… large scale immigration to US begins during Carter administration.

• Note: The Salvadoran military government had less independence from the propertied classes, who did not rule but maintained and effective veto over all economic policy.

• Honduras…

• Military at zenith of influence after Soccer War of ’69… hostile toward El Salvador… pulled out of CACM and quickly made bilateral trade deals with all countries in region except El Salvador.

• The war with El Salvador was economically disruptive and led to popular agitation… hard to keep the players and events straight since the sociopolitical environment had become so unstable.

• Despite this, the decade of the ’70s was one of significant industrial growth, of land reform that directly benefited 10% of the rural population, a social security program covering 30% of the economically active population, and substantial improvements in health and education.

• In general, despite the use of repression during this time, Honduran politics were closer to Costa Rica than Guatemala.

• Nicaragua…

• During the 1950s and 60s the Nicaraguan economy expanded more rapidly than any other economy in Latin America.

• Going into the 70’s the only nation in the region that had a higher per capita income was Costa Rica.

• The economic charge was led by cotton, cattle, sugar and CACM-induced manufacturing production.

• Still, in the context of the existing social structure, this led to major social dislocations, an incredible concentration of economic power and exceptional political tensions.

• The new production pattern reduced the demand for labor, pushing the poor into the cities.

• Rapid economic growth benefited the Somoza family (big in cotton) and consolidated the largest non-Somoza capitalist forces into two coherent and coordinated groups; raising the economic and political stakes within the elite class.

• The rise of a modern urban-working class revitalized urban labor unions that moved out of the grasp of the Somoza state apparatus.

• Still, Luis and Anastacio Somoza retained control of politics throughout the period… until the triumph of the Sandinista revolution in July 1979.

[a] Luis died of a heart attack in 1967, leaving his brother in charge.

• Anastacio lacked the cunning of his father and the velvet gloves of this brother and moved to take overt control of the country.

• Invoked a massive protest that Anastacio and his National Guard moved decidedly against.

[a] Note that extortion was permitted to be committed by the National Guard and they increasingly preyed upon the population => corruption became institutionalized and endemic.

• Opposition began to brew: Frente Sandinista de Liberaction National (FSLN)… dedicated to armed revolution.

• The Guard launched a violent campaign to destroy popular support for the FSLN… which perversely led to an increase in support and recruitment by the FSLN.

• The Church was an outspoken opponent to Somoza regime… led by Archbishop Miguel Obando y Bravo. Note: The Church was not a supporter of the FSLN.

• Richard Nixon’s foreign policy was on the whole based on “low profile” and “benign neglect’… with the exception of Chile and Nicaragua. Throughout the period the US increased financial support of Somoza regime.

• Earthquake in 1972… epicenter was under Managua… the social control mechanism became immobilized… and when order began to be restored it became clear the Somoza and the National Guard were using the situation to enhance their wealth and political power.

• All Nicaraguans outside the Somoza camp were coming to the same conclusion: Somoza had to go.

• Starting in 1974, after a bold move by the FSLN under Daniel Ortega, the country slid into four years of brutal civil war.

• Somoza was ousted and Nicaragua moved into the 1980s with the Sandinistas as the principal force in post revolutionary politics.

• The Sandinistas had only tenuous support from the people and despite a ruined economy and massive external debt, embarked upon a phase of revolutionary social reconstruction.

• Note: When the Sandinistas came to power the Carter administration in Washington was having a difficult time articulating a consistent and constructive foreign policy toward the new Nicaragua. That would rapidly change with the election of Ronald Reagan in 1981. As your book put it: “A few months after his inauguration in January 1981, President Reagan unofficially declared war on the Nicaraguan revolution.” (p. 221)

• Some of the most important passages of this chapter can be found on pages 222 to 225… here are the main points to consider:

[1] Increased economic equality requires explicit social policy, whether such policy is regarded as co-optation of the poor or victory by the poor.

[2] The trick is to promote sustained economic growth in the context of a consistent social policy that guarantees that the benefits accrue to a large portion of the population.

[3] Given the entrenched sociopolitical structure installed in post-colonial Central America, economic growth as well

as the deployment of modern technological advancement, resulted in large portions of the population being displaced, culturally and socially degraded, and ultimately marginalized.

[4] This reserve of surplus labor, with the awareness of inequality and the arrogant culture of the elite, developed into anunstable social base. Throw into the mix some radical ideology and “liberation theology” and you get the bloody

tragedy of civil war.

[5] The foreign policy of the US government, while not a primary cause, only made matters worse. Although, the US Cold War policy of snuffing out communism was realized.

El Salvador… A Troubled Land

- About the size of Massachusetts -

President: Antonio Saca (2004)

Population (2004 est.): 6,587,541

Capital and largest city: San Salvador, 1,791,700 (metro. Area

Monetary unit: Colón; U.S. dollar

Ethnicity/race: mestizo 90%, Indian 1%, white 9%

Economic summary: GDP/PPP (2002 est.): $29.41 billion; per capita $4,600. Real growth rate: 2.1%. Inflation: 3.8% (2001 est.).

Unemployment: 10%—but the economy has much underemployment.

Exports: $3 billion (2002 est.): offshore assembly exports, coffee, sugar, shrimp, textiles, chemicals, electricity.

Imports: $4.9 billion (2002): raw materials, consumer goods, capital goods, fuels, foodstuffs, petroleum, electricity.

Major trading partners: U.S., Guatemala, Honduras, Nicaragua, Mexico, France.

• El Salvador, a small country, was engaged until 1992 in a civil war that cut through class lines, divided the military and the Roman Catholic Church, and severely damaged the social and economic fabric of the nation.

• In 1950, a Constitution was established that provided for public-health programs, women's suffrage, and extended social-security coverage. The reformist impulse continued in the 1960s, when it became legal to organize opposition political parties.

• Food production increased in the 1970s by 44 percent, a growth that was second in Latin America only to Brazil's. Although much of the food grown was exported to world markets, some of the revenue generated was used for social programs in El Salvador. Life expectancy increased; the death rate fell; illiteracy declined; and the percentage of government expenditures on public health, housing, and education was among the highest in Latin America.

• The programs and reforms, in classic Hispanic form, were generated by the upper classes. The elite believed that state-sponsored changes could be controlled in such a way that traditional balances in society would remain intact and elite domination of the government would be assured.

• The origin of El Salvador's Civil War may be traced to 1972, when the Christian Democratic candidate for president, JoseNapoleon Duarte, is believed to have won the popular vote but was deprived of his victory when the army declared the results false and handed the victory to its own candidate. • Impatient and frustrated, middle-class politicians and student leaders from the opposition began to consider more forceful ways to oust the ruling class.• By 1979, guerrilla groups had become well established in rural El Salvador, and some younger army officers grew concerned that a successful left-wing popular revolt was a distinct possibility. Rather than wait for revolution from below, which might result in the destruction of the military as an institution, the officers chose to seize power in a coup and manipulate change from above.• Interesting to note that a destabilizing trigger was the backlash resulting from these officers pushing a land reform program onto El Salvadoran society (1980, the land-reform program resulted in 37% of the lands producing cotton and 34% of the coffee-growing lands being confiscated by the government and redistributed).• Things quickly began to spiral downward, the story is outlined in your book.

• ARENA fought hard against land reform yet would not directly attack the land-reform program—only because such a move would further alienate rural peasants and drive them into the arms of left-wing guerrillas.• Instead, Cristiani favored the reconstitution of collective farms as private plots.• Such a move, according to the government, would improve productivity and put an end to what authorities perceived as a form of U.S.-imposed "socialism." Critics of the government's policy charged that the privatization plan would ultimately result in the demise of land reform altogether.• Yet another problem was that many of the collectives established under the military reform were (and remain) badly in debt. • A 1986 study by the U.S. Agency for International Development (USAID) reported that 95% of the cooperatives could not pay interest on the debt they were forced to acquire to compensate the landlords.• New York Times reported that the world surplus of agricultural products as well as mismanagement by peasants who suddenly found themselves in the unfamiliar role of owners were a large part of the reason for the failures.

• Unfortunately, the government did not help. Technical assistance was not provided, and the tremendous debt gave the cooperatives a poor credit rating, which made it difficult for them to secure needed fertilizer, seeds and pesticides.

• Declining yields and, for many families, lives of increasing desperation have been the result. Some peasants must leave the land and sell their plots to the highest bidder. This will ultimately bring about a re-concentration of land in the hands of former landlords.

• Violence drove many peasants from the land to the slums of the larger cities. And free-fire zones established by the military (in an effort to destroy the guerrillas' popular base) and guerrilla attacks against cooperatives (in an effort to sabotage the economy and further destabilize the country) had a common victim: the peasantry.

• The Civil War continued into 1992, when a United Nations-mediated cease-fire took effect… effects linger and as elsewhere, there is no effective political voice in the middle.

• Implementation of the agreement reached between the government and the FMLN has proven contentious. "But," according to Boston Globe correspondent Pamela Constable, "a combination of war-weariness and growing pragmatism among leaders of all persuasions suggests that once-bitter adversaries have begun to develop a modus vivendi.“

• President Cristiani reduced the strength of the army from 63,000 to 31,500 by February 1993, earlier than provided for by the agreement.

• In 1998, President Armando Calderon Sol surprised both supporters and opponents when he launched a bold program of reforms.

• A dozen years of war had left the economic infrastructure in disarray. The economy had, at best, remained static, and while the war raged, there had been no attempt to modernize.

• In 1998, Hurricane Mitch devastated the country, leaving 200 dead and over 30,000 homeless. In Jan. and Feb. 2001, major earthquakes struck El Salvador, damaging about 20% of the nation's housing.

• An even worse disaster beset the country in that summer when a severe drought destroyed 80% of the country's crops, causing famine in the countryside.

• El Salvador is the third poorest country in Latin America… testifying to the long run cost to economic development stemming from civil war and natural disasters.

• In an attempt to boost economic growth, in November of 2000, the Asamblea Legislativa approved the ARENA government's plan to dollarize the domestic economy.

• The hope was that dollarization would bring in greater FDI.• To date this hope seems to be coming true due to the fact that

El Salvador is experiencing lower interest rates, growing consumer credit, cheaper international financing, and a reduction in transaction costs for firms operating in the domestic economy.

Salvadoran President-elect Tony Saca paints over posts displaying his opponents' political advertising after his victory in recent elections.

Residents of the middle class Las Colinas neighborhood west of the capital, San Salvador, El Salvador look for victims of the 7.6 earthquake that shook Central America

Saturday Jan. 13, 2001.

#7 The International Political Economy of Democracy, the 1980s to the Present

• He points out in his opening passages that this chapter is more about politics than economics.

• This is mainly because economic issues became hostage to political ones although, ironically, the political issues were all rooted in long-standing economic issues.

• My objective in reviewing this chapter will be to lay out the threads of the political developments yet emphasize the economic fallout.

• In many ways the 1980s saw a confluence of internal contradictions in the context of the external Cold War build to a climax; spilling onto the national stage of most Central American nations.

• Consequently, the 1990s were a time of war-weariness, national healing and conciliation. This was also the time when nations reinforced this institutions of democracy and laid plans for their economic futures in early the 21st century.

• The 1980s are often referred to as the “Lost Decade” for Latin America… this essentially means that Latin America was suspended in a period of political and economic crisis. Or as your book puts it: a time of “stagnation, uneven growth, debt crisis, and international economic restructuring.”

• All of this weakened the economies and made politicians susceptible to international pressure (especially from the US). This was especially true for the three counties experiencing civil war.

• The 1984 Caribbean Basin Initiative (CBI) helped a bit, giving select exports from the Caribbean and Central American countries privileged access to US markets.

• US, Western Europe and Japan had conservative governments so the type of political pressure they favored leaned toward global economic integration.

• The multilateral trade initiatives (e.g. NAFTA) had the express intent of forming regional trading blocs are were seen as vehicles of global international integration.

• By the 1980s the combined effects of authoritarian persecution and increase international competition had weakened urban labor as well as other potential dissident forces, enabling the reestablishment of electoral politics. It was generally thought that elected civilian regimes could better deal with the debt and economic chaos created by military rule.

• The Church also moved to replace reformist bishops and university rectors with more conservative appointments.

• US foreign policy during the decade focused on El Salvador and Nicaragua.

[1] President Regan made it a personal crusade to remove the Nicaraguan Sandinistas from power… blew up in the

presidents face with the Iran-Contra scandal.

[2] Soon afterward his administration articulated a mission to promote “democracy” around the world. Has become a cornerstone since the Cold War ended.

• Contras original membership was drawn from Somosa’s ex-National Guard who had fled to Honduras… grew into a mercenary army of between 12,000 and 15,000 men.

• The Contras did not win the hearts and minds of the Nicaraguan people due to their random and brutal tactics. After the Iran-Contra scandal, the US Congress moved to control financial support to the group.

• Finally, at the imitative of President Oscar Arias of Costa Rica. A regional peace plan known as Esquipulas II was signed by all five of the Central American governments in 1987. Set in motion the gradual reduction of violence in both Nicaragua and El Salvador.

• Guatemala (1980s)…

[1] Only after 1983 were the military interested in holding a controlled election in order to receive US foreign aid.

[2] Vinicio Cerezo (Democracia Cristiana Guatemalteca – DCG won)… he investigated the military and initiated a

national dialogue on land reform. Still, he was hemmed in by the military.

[3] This was the period when serious drug money began to course into the region from Columbia which involved

government officials and military officers.

[4] Military permitted elections again in 1989… yet the civil war was still going on.

• El Salvador…

[1] Electoral situation was similar to that of Guatemala.

[2] While the Guatemalan civil war had racial overtones, the civil war in El Salvador was more clearly a class war: the dispossessed against the privileged.

[3] Given the ideological leanings of the guerilla groups in the countryside (communists), the US supported the right (the

privileged) and came to provide the El Salvadoran government with half of its budget.

[4] ARENA dominated right-wing politics and developed a platform that was neoliberal pro-business. It stressed

reduced government intervention in the economy yet was open to negotiating social reform.

[5] With the help of the UN, ARENA, under Alfredo Cristiani, worked out an acceptable peace agreement with the

guerillas in 1989.

• Nicaragua…

[1] During the war in the 1980s the FSLN initiated a program that called for a mixed private-public economy with the vast majority of nationalizations being of property formerly owned by the Somozas and the National Guard leadership.

[2] By the mid-1980 the war was exhausting the economic and political resources available to the FSLN.

[3] Also, fear and uncertainty resulted in economic stagnation. The FSLN turned to an inflationary form of deficit financing to prime the economy. Turned into hyperinflation by the late 1980s (monthly inflation approached 200%). The Nicaraguan population developed a deep dissatisfaction and desperation at this point.

[4] The national election in February 1990 saw the Sandinistas lose to a conservative but heterogeneous coalition of seven parties united under the banner of Union Nacional Oposiora (UNO).

[5] Their leader Violeta Chamorro became president yet had to work with a National Assembly that continued to be dominated by the FSLN.

[6] Bush the first was president in the US and immediately after the elections ended the embargo, provided additional aid and credit and stopped supporting the Contras. Still,

since 1990 US aid to Nicaragua has been minimal.[7] Politics were difficult during the 1990s in Nicaragua due to fractured alliances and with tensions caused by the

return of ex-Contra soldiers and the demobilization of the FSLN military. During the decade little progress was achieved in reforming state institutions or in implementing social policy initiatives.• Honduras…

[1] The 1980s dawned with the military still in control of the institutions of government.

[2] Elections closely supervised.

[3] The decade was dominated by war in all neighboring countries… this this often spilling onto Honduran territory.

[4] This kept the military at the center of society and in return for US aid, the government permitted Contra guerrilla training camps near the Nicaraguan border.

[5] When Reagan’s Nicaraguan strategy began to unwind, the National Party assumed the presidency (Rafael Leonardo

Callejas). His first year in office was marked by the largest land invasion in Honduran history and major strikes.

[6] Civil disobedience continued in the early 1990s and the military responded. The Honduran civil rights record

deteriorated yet the military restored order and began to back out of the institutions of civil society.

• Costa Rica…

[1] 1982 to 1986 was an economically difficult time for the country due to debt and a global recession.

[2] Oscar Arias assumed the presidency in 1986 yet was hampered by the debt overhang and an expensive system of social services.

[3] He implemented an IMF-sponsored structural adjustment program that resulted in additional hardships to the people.

[4] Landlessness continues to be an area of contention that is complicated by the efforts to preserve large tracks of land for national parks: fueled by “debt-for-nature swaps”.

[5] Also, Costa Rica has an open immigration policy that has led to over a million Nicaraguans and Columbians coming to the country fleeing poverty and violence.

• In the 1990s all international agents with influence in the region equated democracy with “free market” capitalism. This approach did not encourage institutional reform but rather strict adherence to the principals of structural adjustment (see slide 29).

• Came to be called the neoliberal agenda: sell public enterprises, reduced public regulation, scaling back of subsidies, tariffs, quotas and all other impediments to the free functioning of markets, fiscal and monetary restraint. All this hit the fledgling social welfare programs in the region hard, increasing the incidence of poverty.

• In other words, the capacity of the state as a vehicle for change was arrested by these policies during the 1990s and early 2000s.

• While in the short run poverty and inequality has become worse, there is a substantial literature suggesting that if the Central American countries can maintain genuine participatory democracy for a sufficient period of time, social reform will gradually appear.

• And while your book says something to the contrary on page 234, more recent studies show a strong correlation between “real” democracy and economic growth.

[1] This is because democratic institutions support and strengthen the rule of law; leading to the enforcement of property rights, the protection of individual rights, punishing corruption and increasing the rewards from being entrepreneurial.

• Of course this is a long, slow process and the entrenched elites who benefit from the working rules of the old system will resist change, as well as act to subvert change, every step of the way.

• Yes, the assumption of “trickle down” economics is flawed yet with FDI, NGO activities, along with public attention to the basic building blocks of a productive life (sanitation, clean water, access to health care and education, reducing hunger) most of the poor can benefit within this framework.

• Ultimately it is important to remember that with the properly enforced “rules of the game” (i.e. laws and regulations) economic exchange is a positive-sum, win-win game. It is only when the big, powerful elites write the rules of the game that it degenerates into a zero-sum, win-lose game.

• Weaver points out that the middle-class has a very important role to play in this process of change in Central America. He states that their urban location, communication and organizational skills, experience and contacts give them special advantage in political campaigns. They are able to exert an influence disproportionate to their numbers and economic status.

• We have witnessed a growing middle class in each Central American nation over the past 10 years, and as their ranks grow, so will their ability to initiate constructive institutional reform.

• Still, we must recognize the fact that the greater the inequality when democracy truly begins, the more dangerous the passage to a genuinely democratic, egalitarian society.

• History is a weighty burden yet there are Latin American examples of nations that have moved considerably toward more democratic, open, egalitarian systems: Costa Rica and Chile.

NICARAGUA: A nation in recovery

- about the size of New York -

• President: Enrique Bolaños (2002)• Population (2004 est.): 5,232,216 (growth rate: 2.0%); birth rate: 25.6/1000; infant mortality rate: 30.3/1000; life expectancy: 70.0; density per sq mi: 105• Capital: Managua, 1,390,500 (metro. area), 1,146,000 (city proper)• Monetary unit: Gold cordoba• Ethnicity/Race: mestizo (mixed Amerindian and white) 69%, white 17%, black 9%, Indian 5% • Economic summary: GDP/PPP (2002 est.): $11.16 billion; per capita $2,200. Real growth rate: 1.1%.• Inflation: 3.7%• Unemployment: 24% plus considerable underemployment (2002 est.). • Exports: $637 million (f.o.b., 2002 est.): coffee, bananas, sugarcane, cotton, rice, corn, tobacco, sesame, soya, beans; beef, veal, pork, poultry, dairy products. • Imports: $1.7 billion (f.o.b., 2002 est.): machinery and equipment, raw materials, petroleum products, consumer goods. • Major trading partners: U.S., El Salvador, Honduras, Costa Rica, Venezuela, Guatemala, Mexico, South Korea.

• Nicaraguan society, culture, and history have been molded to a great extent by the country's geography. A land of volcanoes and earthquakes, the frequency of natural disasters in Nicaragua has profoundly influenced its peoples' perceptions of life, death, and fate.

• Nicaragua is a divided land, with distinct geographic, cultural, racial, ethnic, and religious zones.

• The east coast's geography, economy, and isolation from Managua, the nation's capital city, have created a distinct identity among its people. Many east-coast citizens think of themselves as costenos ("coast dwellers") rather than Nicaraguans.

[1] Note: About 70 percent of the east-coast population, regardless of ethnic group, are members of the Protestant Moravian Church.

• 1979 Revolution…

[1] Sandinistas—who took their name from a guerrilla, Augusto Cesar Sandino, who fought against occupying U.S. forces in the late 1920s and early 1930s— adopted a new policy toward the eastern neglected region.

[2] The Sandinistas were concerned with the east coast's history of rebelliousness and separatism, and they were

attracted by the economic potential of the region (palm oil and rubber).

[3] Accordingly, they hastily devised a bold campaign to unify the region with the rest of the nation. Roads, communications, health clinics, economic development, and a literacy campaign for local inhabitants were planned. The Sandinistas, in defiance of local customs, also tried to organize the local population into mass socialistic formations.

[4] It was believed in Managua that such groups would unite the people behind the government and the Revolution and

facilitate the economic, political, and social unification of the region. In general, the attempt failed and regional tensions

within Nicaragua persist to this day.[5] It was the critical state of the Nicaraguan economy that

in large measure brought the Sandinistas down in the elections of 1990.

• Even though the government of Violeta Chamorro made great progress in the de-militarization of the country and national reconciliation, the economy remained a time bomb.

• The continuing economic crisis and disagreements over policy directions destroyed the original base of Chamorro's political support. Battles between the legislative and executive branches of government virtually paralyzed the country.

• But by July 1995, an accord had been reached between the two contending branches of government. Congress passed a "framework law" that created the language necessary to implement changes in the Sandinista Constitution of 1987.• The November 1996 election marked something of a watershed in Nicaraguan political history. Outgoing president Chamorro told reporters at the inauguration of Arnoldo Aleman Lacayo: "For the first time in more than 100 years ... one civilian, democratically elected president will hand over power to another.“• The Aleman administration confronted a host of difficult problems. In the Western Hemisphere, only Haiti is poorer. Perhaps 80 percent of the population were unemployed or underemployed, and an equal percentage live below the poverty line.

• Just as the economy began to show some signs of recovery from years of war, Hurricane Mitch devastated the country in 1998 and profoundly set back development efforts, as all available resources had to be husbanded to reconstruct much of Nicaragua's infrastructure.

• In 1998, Hurricane Mitch killed more than 9,000 people, left 2 million people homeless, and caused $10 billion in damages. Many people fled to the U.S., which offered Nicaraguans an immigration amnesty program until July 1999.

• Economic malaise compounded by allegations of corruption and illegal enrichment undermined the credibility of the Aleman government. Dissatisfaction among voters was registered at the polls, resulting in Sandinista victories in Managua and nine of 17 provincial capitals in municipal elections in November 2000.

• In Nov. 2001 presidential elections, Enrique Bolaños, the ruling Liberal party leader, defeated Daniel Ortega, the Sandinista leader who had attempted a comeback after his defeat in 1990. The Sandinistas elected Ortega as party head in March 2002, despite his series of losses in recent presidential elections.

• Former president Arnoldo Aleman was charged with fraud and embezzlement in Aug. 2002, and jailed a year later pending his trial. Prosecutors allege that he stole $100 million in state funds during his presidency.• Nicaragua remains one of the poorest countries in the Western Hemisphere. Property is often caught in a three-way battle between those who owned it before the Sandinistas came to power; cooperatives set up by the Sandinistas; and former Contras who claim they were promised land for joining the anti-Sandinista forces. • Still, there are some promising signs. FDI is up and Managua is undergoing a mini-building boom… overall economic activity is up.• Late last year the World Bank’s International Development Association (IDA) and the International Monetary Fund (IMF) agreed that Nicaragua had taken the steps necessary to reach its completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. Debt relief under the enhanced HIPC Initiative from all of Nicaragua’s creditors will amount to approximately US$4.5 billion over time… bringing total external debt below the US$2 billion mark.• This will give the government more latitude to tap international credit markets to help finance economic reconstruction as well as new social development initiatives.

Costa Rica: A different tradition?

- About the size of West Virginia -

• President: Abel Pacheco (2002)

• Population (2004 est.): 3,956,507 (growth rate: 1.5%)

• Capital and largest city (2003 est.): San José, 1,527,300 (metro. area), 337,200 (city proper)

• Monetary unit: Colón

• Ethnicity/race: white (including mestizo) 94%, black 3%, Indian 1%, Chinese 1%, other 1%

• Economic summary: GDP/PPP (2002 est.): $32 billion; per capita $8,300. Real growth rate: 2.8%. Inflation: 9.1%. Unemployment: 6.3%. Arable land: 4%. Agriculture: coffee, pineapples, bananas, sugar, corn, rice, beans, potatoes; beef; timber. Industries: microprocessors, food processing, textiles and clothing, construction materials, fertilizer, plastic products.

• Exports: $5.1 billion (2002): coffee, bananas, sugar; pineapples; textiles, electronic components, medical equipment.

• Imports: $6.4 billion (2002): raw materials, consumer goods, capital equipment, petroleum. Major trading partners: U.S., Netherlands, UK, Japan, Mexico.

• Costa Rica has often been singled out as politically and socially unique in Latin America. It is true that the nation's historical development has not been as directly influenced by Spain as its neighbors' have, but this must not obscure the essential Hispanic character of the Costa Rican people and their institutions.

• Historian Ralph Woodward observes that historically, Costa Rica's "uniqueness was the product of her relative remoteness from the remainder of Central America, her slight economic importance to Spain, and her lack of a non-white subservient class and corresponding lack of a class of large landholders to exploit its labors."

• Despite the recent atmosphere of crisis and disintegration in Central America, Costa Rica's durable democracy has avoided the twin evils of oppressive authoritarianism and class warfare. But what might be construed as good luck is actually a reflection of Costa Rica's history.

• In social, racial, linguistic, and educational terms, Costa Rica is an integrated country without the fractures and cleavages that typify the rest of the region.

• Since the 1940s modernizers who wanted to create a dynamic capitalist economy took care to pacify the emerging labor movement with appropriate social legislation and benefits.

• Moreover, to assure that development did not sacrifice social welfare, the state assumed a traditional role with respect to the economy—that is, it took an active role in the production and distribution of income.

• After much discussion, in 1993, the Costa Rican Congress authorized the privatization of the state-owned cement and fertilizer companies. In both cases, according to Latin American Regional Reports, "a 30 stake [would] be reserved for employees, 20 [would] be offered to private investors, and the remainder [would] be shared out between trade unions... and cooperatives." Tight controls were retained on banking, insurance, oil refining, and public utilities.

• Costa Rica's political stability is assured by the politics of consensus.

• Other oft-given reasons for Costa Rica's stability are the high levels of tolerance exhibited by its people and the absence of a military establishment.

• Costa Rica has had no military establishment since a brief civil war in 1948. Government officials have long boasted that they rule over a country that has more teachers than soldiers.

• The aftermath of Central America's civil wars is still being felt. Although thousands of refugees returned to Nicaragua with the advent of peace, many thousands more remained in Costa Rica.

• Economic malaise in Nicaragua combined with the devastation of Hurricane Mitch in 1998 sent thousands of economic migrants across the border into Costa Rica. "Ticos" are worried by the additional strain placed on government resources in a country where more than 80 percent of the population are covered by social-security programs, and approximately 60 percent are provided with pensions and medical benefits.

• The economy has been under stress since 1994, and President Figueres was forced to reconsider many of his statist policies. While the export sector remained healthy, domestic industry languished and the internal debt ballooned.

• The Costa Rican-American Chamber of Commerce observed that "Costa Rica, with its tiny $8.6 billion GDP and 3.5 million people, can not afford a government that consistently overspends its budget by 5 percent or more and then sells short-term bonds, mostly to state institutions, to finance the deficit.“ • In 1997, there was a vigorous debate over the possible privatization of many state entities in an effort to reducethe debt quickly.

• In 1998, Miguel Angel Rodríguez of the Social Christian Unity Party became president, pledging economic reforms, such as privatization.

• Acknowledging that the world had entered a new phase of development. President Rodriguez introduced a new economic program in January 2001. Called Impulse ("Impulse"), the plan, as reported in The Tico Times, noted that for Costa Rica to compete in the new global economy, "knowledge, technology, quality of human resources and the development of telecommunication and transportation infrastructures are fundamental determinants of national prosperity."

• The old model of economic development, which, according to the president, was characterized by "a diversification of exports, liberalized markets and high levels of foreign investment," must be replaced with a fresh approach "rooted in advanced technological development, a highly qualified labor force, and exports of greater value.“

• A psychiatrist, Abel Pacheco, also of the Social Christian Unity Party, won the presidency in elections held in April 2002.

• At a time when tropical rain forests globally are under assault by developers, cattle barons, and land-hungry peasants, Costa Rica has taken concrete action to protect its environment. • About 13 percent of Costa Rica's land is protected currently in a number of national parks. It is hoped that very soon about 25 percent of the country will be designated as national parkland in order to protect tropical rain forests as well as the even more endangered tropical dry forests.

• Much of the assault on the forests typically has been dictated by economic necessity and/or greed. In one all-too-common scenario, a small- or middle-size cacao grower discovers that his crop has been decimated by a blight.

• Confronted by disaster, he will usually farm the forest surrounding his property for timber and then torch the remainder. Ultimately, he will likely sell his land to a cattle rancher, who will transform what had once been rain forest or dry forest into pasture.

• In an effort to break this devastating pattern, the Costa Rican government has devised a workable plan to save the forests: Farmers are introduced to a variety of cash crops so that they will not be totally dependent on a single crop. Also, in the case of cacao, for example, the farmer will be provided with a disease or blight-resistant strain to lessen further the chances of crop losses and subsequent conversion of land to cattle pasture.

• All of this is supported by specially targeted state funding and an active public extension service.

• Currently, foreign investors remain attracted by the country's political stability and high education levels… and tourism continues to bring in foreign exchange. • At the same time, the government continues to grapple with its large deficit, its growing debt, the need to modernize the state-owned electricity and telecommunications sector, and with the social pressures stemming from massive Nicaraguan and Columbian emigration.

Dr. Abel Pacheco, president of the Republic of Costa Rica, recently received the Kolbe Prize for Peace in recognition of his leadership at the United Nations in the ongoing debate over human cloning.

Panama: A nation and a canal

- About the size of South Carolina -

• President: Mireya Moscoso (1999)

• Area: 30,193 sq mi (78,200 sq km)

• Population (2004 est.): 3,000,463 (growth rate: 1.3%); birth rate: 20.4/1000; infant mortality rate: 21.0/1000; life expectancy: 72.1; density per sq mi: 99

• Capital and largest city (2003 est.): Panama City, 1,053,500 (metro.area), 437,200 (city proper)

• Monetary unit: balboa (coins); U.S. dollar (all paper currency)

• Economic summary: GDP/PPP (2002 est.): $18.06 billion; per capita $6,200. Real growth rate: 0.7%. Inflation: 1.1% (2001 est.).

• Exports: $5.8 billion (f.o.b., 2002 est.): bananas, shrimp, sugar, coffee, clothing.

• Imports: $6.7 billion (f.o.b., 2002 est.): capital goods, crude oil, foodstuffs, consumer goods, chemicals.

• Major trading partners: U.S., Sweden, Costa Rica, Honduras, Colombia, Japan, Venezuela.

• Explored by Columbus in 1502 and by Balboa in 1513, Panama was the principal shipping point to and from South and Central America in colonial days.

• In 1821, when Central America revolted against Spain, Panama joined Colombia, which had already declared its independence. For the next 82 years, Panama attempted unsuccessfully to break away from Colombia.

• Between 1850 and 1900 Panama had 40 administrations, 50 riots, 5 attempted secessions, and 13 U.S. interventions. After a U.S. proposal for canal rights over the narrow isthmus was rejected by Colombia, Panama proclaimed its independence with U.S. backing in 1903.

• Panama is a country of minorities and includes blacks. Mestizos (mixed Indian and white), Indians, and Chinese. Many of the blacks and Chinese are the children or grandchildren of the thousands of workers who were brought to Panama to build the canal. Unable to return home, they remained behind, an impoverished people, ignored for decades by a succession of Panamanian governments.

• Although Indians are not restricted to tribal areas, most remain by choice, reflecting a long tradition of resistance to assimilation and defense of their cultural integrity.

• The government has usually been dominated by whites, although all of the country's minorities are politically active.

• The Panama Canal, opened to shipping in 1914, has had a sharp impact on Panamanian political life, foreign policy, economy, and society.

• For canal rights in perpetuity, the U.S. paid Panama $10 million and agreed to pay $250,000 each year, which was increased to $430,000 in 1933. It was increased again in 1955. In exchange, the U.S. got the Canal Zone—a 10-mile-wide strip across the isthmus—and considerable influence in Panama's affairs.

• Panama's economy has both profited and suffered from the presence of the canal. Because governments traditionally placed too much reliance on the direct and indirect revenues generated by the canal tolls, they tended to ignore other types of national development.

• Much of Panama's economic success in the 1980s, however, was the result of a strong service sector associated with the presence of a large number of banks, the Panama Canal, and the Colon Free Zone. Agriculture and industry, on the other hand, usually experienced slow growth rates.

• Because of U.S. control of the canal and the Canal Zone, this path between the seas continuously stoked the fires of Panamanian nationalism. The high standard of living and the privileges enjoyed by U.S. citizens residing in the Canal Zone contrasted sharply with the poverty of Panamanians.

• President Omar Torrijos became a national hero in 1977 when he signed the Panama Canal Treaties with U.S. president Jimmy Carter. The treaties provided for full Panamanian control over the canal and its revenues by 1999.

• Panamanian officials spoke optimistically of their plans for the bases they would soon inherit, citing universities, modem container ports, luxury resorts, and retirement communities. But there was much concern over the loss of an estimated $500 million that tens of thousands of American troops, civilians, and their dependents had long pumped into the Panamanian economy.

• President Torrijos, who died in a suspicious plane crash in 1981, left behind a legacy that included much more than the treaties. He elevated the National Guard to a position of supreme power in the state and ruled through a National Assembly of community representatives.

• The 1984 elections appeared to bring to fruition the process of political liberalization initiated in 1978. But even though civilian rule was officially restored, the armed forces remained the real power behind the throne. Indeed, spectacular revelations in 1987 strongly suggested that Defense Forces chief general Manuel Antonio Noriega had rigged the 1984 elections. He was also accused of drug trafficking, gun running, and money laundering.

• In February 1988, Noriega was indicted by two U.S. grand juries and charged with using his position to turn Panama into a center for the money-laundering activities of the Medellin, Colombia, drug cartel and providing protection for cartel members living temporarily in Panama.

• The fraud and violence that accompanied an election called by Noriega in 1989 to legitimize his government and the failure of a coup attempt in October ultimately resulted in the invasion of Panama by U.S. troops in December. Noriega was arrested, brought to the United States for trial, and eventually was convicted on drug-trafficking charges.

• Nearly a decade-and-a-half after the invasion by U.S. troops to restore democracy and halt drug trafficking, the situation in Panama remains problematic. The country is characterized by extremes of wealth and poverty, and corruption is pervasive. The economy is still closely tied to drug-money laundering, which has reached levels higher than during the Noriega years.• The 1999 elections produced a close campaign between Martin Torrijos, the son of Omar, and Mireya Moscoso, the widow of the president who had been ousted by Omar Torrijos. Moscoso emerged as a winner, with 44 percent of the vote, and became Panama's first woman president.•Moscoso opposes many of Perez's free-market policies and has been especially critical of any further plans to privatize state-owned industries.

• Moscoso has identified her administration with the inauguration of a "new era" for Panama's poor. Her social policies stand in direct contrast to the more economically pragmatic approach of her predecessors.

• Diversification of the economy remains a need, as Panama is still overly dependent on canal revenues and traditional agricultural exports. As supplement to the income produced by the canal, the Panama Canal Railway has been refurbished so that it can now transport container cargo in less time than it takes for a ship to transit the canal (began operations in 2001).

As ships get bigger, Panama feels the pinch: A freighter on the Panama Canal passes through the Miraflores Locks. Most ships now under construction will be too large to fit through the

locks.

President Bush talks with Panama's President Mireya Moscoso and Argentina's President Fernando de la Rua prior to the official group photo at the Citadelle during the Summit of the Americas in Quebec City,

Canada.