Growth and Crisis in the Central American Economies, 1950-1980 Author(s): hector perez brignoli and YOLANDA BAIRES MARTINEZ. Jstor is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content.
Growth and Crisis in the Central American Economies, 1950-1980 Author(s): hector perez brignoli and YOLANDA BAIRES MARTINEZ. Jstor is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content.
Growth and Crisis in the Central American Economies, 1950-1980 Author(s): hector perez brignoli and YOLANDA BAIRES MARTINEZ. Jstor is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content.
Growth and Crisis in the Central American Economies, 1950-1980
Author(s): Hector Perez Brignoli and Yolanda Baires Martinez
Source: Journal of Latin American Studies, Vol. 15, No. 2 (Nov., 1983), pp. 365-398 Published by: Cambridge University Press Stable URL: http://www.jstor.org/stable/155884 . Accessed: 08/05/2014 09:58 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp . JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. . Cambridge University Press is collaborating with JSTOR to digitize, preserve and extend access to Journal of Latin American Studies. http://www.jstor.org This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions J. Lat. Amer. Stud. 15, 365-398 Printed in Great Britain 365 Growth and Crisis in the Central American Economies, I95o-I980* By HECTOR PEREZ BRIGNOLI, assisted by YOLANDA BAIRES MARTINEZ I Prosperity and increasing inequality may well be the most suitable terms to describe at first glance the evolution of the Central American economies from the post-war period until the beginning of the eighties. Prosperity based on a very favourable external economic situation was characteristic of the fifties, with promotion of technological modernization and some diversification in the export sector. Sustained economic growth continued during the following decade, thanks to structural change brought about by industrialization and by the process of Central American integration. This upward trend began to break up in the seventies, and the whole region was plunged into crisis and instability. Although the gloomy side of the new international situation cannot be denied, twenty or thirty years of prosperity seem to have created internal conditions sufficient to nurture a social conflict of vast proportions, which embraces since at least 1978 not only the economic sector but all aspects of Central American life. Our objective here is to study economic growth in the Central American countries between I950 and 1980, examining the behaviour of some aggregate indices to try to establish the nature of the structural change brought about by industrialization and the integration process. Particular emphasis is given to the repercussions of growth on employment and the quality of life, taking careful account of regional nuances and differences. Finally, the nature and scope of the present crisis will be discussed. * The text was read by Sr 0. N. Feinstein, who made very interesting comments. The final result is the sole responsibility of the authors. The text was translated into English by Mrs B. Childs. This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions 366 Hector Perez Brignoli II The growth and fluctuations in the prosperity of the region are clearly shown in Tables i and 2 and Fig. i. The rates of increase in GDP (Gross Domestic Product) are high in the fifties, rise further in the following Table i. Annual average rates of growth of GDP (z19o-i979) (percentages) I950-9 i960-9 9 970-9 Guatemala 4.0 5.4 5.8 El Salvador 4.8 6.i 4.7 Honduras 3.3 5.3 3.6 Nicaragua 5.6 7.5 2.5 Costa Rica 6.8 6.8 5.8 Source: calculated on the basis of Table 2200 in Statistical Abstract of Latin America, Wilkie and Haber (eds.), vol. 21 (Los Angeles, University of California, I98I). The GDP series was expressed in 1970 dollars and an exponential function was fitted to calculate the rate of growth. Table 2. Variations in the annual percentage change of GDP (19 0-1979) (coefficient of variation expressed as a percentage) I950-9 1960-9 1970-9 Guatemala 67 41 27 El Salvador 51 47 63 Honduras 102 41 74 Nicaragua 85 53 6I Costa Rica 83 23 43 Source: same as Table i. decade, and decline slightly between I970 and 1979. They vary according to country. Within the general picture of a sustained expansion, Honduras shows a comparatively weaker growth rate particularly between 95 and 1969, whereas the economy of Nicaragua shows a strong decline in the rate of increase of GDP: from 7.5 % p.a. in I960-9 to 2.5 % p.a. in the following decade. These regional discrepancies are even better illustrated in Table 2, which shows fluctuations in GDP expressed in annual percentage terms. It is also obvious that the growth figures for the sixties are not only higher, but also more stable. Because Central American economies are particularly open, that is to say imports and exports represent a relatively high percentage of GDP (see This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions Post-war Central American Economies 367 % + I I i i I 0 1950 1955 1960 1965 1970 1975 0 / Guatemala 10- 20_ 30 - % 20- 10- 0 0 Vf EEl Salvador 10- 20- + % 10- O0 0_~ \/ ~~~Honduras 10- 20- 10- 0 Nicaragua 10- 20- 30- 20- % 10- Costa Rica % 10- 0 1950 1955 1960 1965 1970 1975 ! i ! i I ! Fig. i. Annual changes in GDP (Gross Domestic Product) (in percentages). The annual changes have been calculated with GDP at constant prices (1970 dollars). Source: Statistical Abstract of Latin America, vol. 2 . Table 3), the trade balance and balance of payments figures1 are very significant indicators for an initial assessment of Central American countries' rate of economic growth (see Fig. 2). The stable behaviour of the fifties and sixties is confirmed yet again and some conclusions may be 1The change in net international reserves has been taken as a guide to the behaviour of the balance of payments, since what is of interest is the net inflow of capital. In the IMF's balance of payments presentation, an increase (fall) in net international reserves is recorded by a minus (plus). In Fig. 2. however, in order to achieve a comparison with the visible trade balance, an increase in net international reserves is recorded on the positive axis and a fall on the negative axis. This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions 368 Hector Pereg Brignoli Table 3. Exports and imports of goods and services as a percentage of GDP Countries Guatemala Exports to CACM Imports from CACM Total Exports Total Imports El Salvador Exports to CACM Imports from CACM Total Exports Total Imports Honduras Exports to CACM Imports from CACM Total Exports Total Imports Nicaragua Exports to CACM Imports from CACM Total Exports Total Imports Costa Rica Exports to CACM Imports from CACM Total Exports Total Imports I960 I970 1976 I980 I 6 5 7 1 6 5 7 I 3 2 3 13 19 22 22 15 I8 26 26 2 7 6 6 2 6 8 8 20 25 38 29 25 25 39 34 2 3 3 3 2 8 5 4 22 26 35 37 23 34 42 5I I 6 6 4 i 6 8 14 23 27 33 25 25 29 34 48 0.4 5 5 6 I 7 6 4 21 28 30 25 26 35 36 40 Source: Yearbook of National Accounts Statistics, r977 (New York, United Nations, 1978), vol. i. Individual Country Data; Consejo Monetario Centroamericano, Boletin Estadistico, 1977J r980. derived on the instability of the seventies: there are very strong fluctuations in the balance of trade figures, which are almost invariably compensated by a favourable balance of payments position. There is a change in this state of affairs towards the end of the decade, when a coincidence of trade deficits and net capital outflows threatens the whole picture.2 In the same period of time foreign debt tends to increase considerably. Fig. 2 shows some figures on the servicing of external public debt in terms of percentage of values of exports which gave us an even clearer illustration of this phenomenon. It is worth noting, however, that in spite of the growth in debt of the Central American countries they are still far removed from the debt burden of other Latin American Countries. For example, in an already critical year 2 The unfavourable situation deteriorated even further between I979 and i982. This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions Post-war Central American Economies 369 (1978) in Costa Rica alone the servicing of the external public debt was 2 3.4 % of the total value of exports, whereas in the rest of Central America the proportion was rather lower. In the same year, however, the servicing of public debt in Bolivia represented 48.5 % of exports, 59.9 % in Mexico, 62 % in Panama and 28.5 % in Brazil.3 Fig. 2 also shows some regional differences. Nicaragua, Guatemala and Costa Rica show a greater amount of fluctuation, while in the case of Costa Rica one observes a persistent and growing deficit in its trade balance, beginning in the sixties. An initial explanation of the behaviour of growth rates in GDP between I950 and 1980, as is legitimate for open economies, can be found by referring to the international economic situation. (See the movement of terms of trade in Fig. 3). Prices for coffee were particularly high in the 1950 s, coffee being a traditional export of the area. During the next decade, the same situation prevailed thanks to modernisation (which brought about a considerable increase in the exportable surplus) and diversification (renewed expansion for bananas, increasing importance of sugar, cotton and livestock) of the agricultural export sector. In the 1970s, however, the external situation presents much greater difficulties: a decline in export prices (except for a temporary increase in the price of coffee between 1976 and 1977), and an increase in the price of imports, especially oil since 1973. To these must be added the effects of natural disasters which had strongly negative repercussions such as the Nicaragua and Guatemala earthquakes (in 1972 and 1976, respectively) and Hurricane Fifi, which devastated Honduras in 1974. Industrialisation and the Central American Common Market (CACM) are rather more than additional factors to be taken into consideration for a more comprehensive understanding of the GDP pattern of growth. It is the qualitative changes which resulted from structural modifications in Central America, some of which can be seen in Tables 4, 5 and 6, that have to be considered. The participation of manufacturing industry in the GDP total increases at a constant and sustained rate. Growth rates for industrial activity (Table 6) are higher than growth rates of GDP (Table I). We shall now examine in greater detail this process of structural change. 3 See J. Wilkie and S. Haber (eds.), Statistical Abstract of Latin America. vol. 21 (Los Angeles, University of California, I98i), table 3006. This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions 1955 1960 1975 170 975 Net 1960 1965 1970 1975 international ' reserves I I / \ I . ...A ...I A 150 - 100 - Guatemala Trade\ balance Public external debt service as a percentage of exports El Salvador Debt (%) -20 - 10 0 Debt (%) 10 lo Honduras ,, , \ /, \ _Y'~ - - --1 - - -/ , _ / J - I,' I \7V-' -~ -- N" Debt (%) I 10 1955 1960 1965 1970 1975 l l l l l l Trade balance and changes in net international reserves (million dollars) Fig. 2. Trade balance, changes in net international reserves and servicing of the public external debt (i951-79). III Industrial development in the Central American countries has been rapid, but late in coming within the context of Latin America, and very soon showed signs of exhaustion. One very original characteristic has been the fact that industrialization did not take place in response to a crisis in the balance of payments or to exhaustion of the export cycle. The incentive for diversification came, to a large extent, from a proposal for regional 37o Hector PNreg Brignoli 200 200 50 0 50 100 - 150 200 100- 100 - + 50- 0 50- 100 - I This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions Post-war Central American Economies V Public external debt service as a percentage of exports 100- 4- 50- Costa Rica 100 - 150- 200- V \ Debt (%) 250- - 30 300 - -20 350- - -10 400- - 0 1955 1960 1965 1970 1975 Trade balance and changes in net international reserves (million dollars) Fig. 2 (cont.). Source: Statistical Abstract of Latin America, vol. 21. integration brought about by the joint efforts of the following pressure and interest groups: (a) the opinion of international technical experts and advisers (particularly from The Economic Commission for Latin America (ECLA), who based their views on the relative size of the Central American countries and on their conviction that the substitution of imports was essential ;4 (b) government decisions based on the interests and circumstances at the time, as well as the existence of an underlying 4See Isaac C. Orantes. Regional Integration in CentralAmerica (London, D. C. Heath, 1972); Gary W. Wynia. Politics and Planners (Madison, University of Wisconsin Press, 1972). 37I This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions 372 Hector Pere5 Brignoli 200. 150- l uu ~- E El Salvador --- - 50- 200- 150 - 100 Honduras 50- 200 - 150- 100 1 Nicaragua -- 50- 200- 150 - 100 1 1 197 Costa Rica 50- 1945 1950 1955 1960 1965 1970 1975 l l l l Fig. 3. Terms of trade (I94/-zI76) (1970 = 00oo). Source: Statistical Abstract of Latin America, vol. 20. historical and cultural tradition taking shape in the form of a Central American nation5; (c) the interests of North American investors and the policies of the Department of State in that area (the Cuban question, renewed interest in the area, Alliance for Progress).6 What integration meant for the economic point of view was an extension of the consumer market and the export of industrial goods for each of the Central American republics. Since each nation retained its own sovereignty, this market expansion depended on agreements, organizations and legislation at the regional level.7 5 See Thomas L. Karnes. The Failure of Union, Central America, 1824-1960 (Chapel Hill, University of North Carolina Press, 196I). 6 See Susanne Jonas Bodenheimer, 'El Mercomiin y la ayuda norteamericana', in Rafael Menjivar etal., La inversidn extranjera en Centro america (San Jose, Educa, 1974), pp. 2 3-166. 7 See Enrique Delgado, 'Institutional Evolution of the Central American Common Market and the Principle of Balanced Development', in W. R. Cline and E. Delgado / This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions Post-war Central American Economies 373 Table 4. Share of manufacturing industry in GDP (at I970 prices) (percentages) Guatemala El Salvador Honduras Nicaragua Costa Rica 1945 n.a. I1.4 7.5 11.4 n.a. 1950 11.i 12.9 9. io.8 11.5 1955 II.2 13.8 11.9 11.5 I2.5 1960 II.7 I3.9 1I.4 12.6 11.1 1965 I3.0 I6.7 iI.8 I5.4 I3.5 1970 14.6 17.6 I4.1 I9.2 I5.I I975 14.0 17.9 13.9 19.5 I7.2 1978 I5-I 8.7 I5.3 30.2 I8.4 Source: ECLA, Statistical Yearbook of Latin America, I979 (United Nations, New York, I980), p. 70. Table 5. Value added by manufacturing industry (I94y-1978) (millions of I970 dollars) Guatemala El Salvador Honduras Nicaragua Costa Rica 1945 n.a. 38.3 19.8 20.I n.a. I950 98.0 66.o 29.9 25.8 34.3 1955 111.0 88.3 43.9 40.9 55.5 1960 I50.5 112.2 53.4 50 65.8 i965 21i 5.8 I87.7 7I.0 99.2 109.9 1970 320.6 245.9 104.0 I49.2 172.0 1975 403.5 326.3 114.7 I98.5 262.8 1978 531.7 391.6 152.8 213.I 341.5 Source: ECLA, op. cit.; Statistical Abstract..., table 2200oo, loc. cit. ECLA's original proposal, which involved the creation of complementary industries, and by this we mean non-competitive, changed radically between I960 and I962. Free trade was decided upon with reference to industrial products of Central American origin8 with a package of tax incentives applicable to 'integration' industries.9 Inter-regional trade increased rapidly in the sixties, but in a few years serious obstacles of a different nature made their appearance. On the one .hand, the option of free trade - one of the conditions imposed by the U.S. investors and by (eds.), Economic Integration in Central America (Washington, The Brookings Institution, 1978), pp. 17-5 8; SIECA/INTAL, El desarrollo integrado de Centro America en la presente decada (Buenos Aires, BID/INTAL, I973), 2 vols.; Eduardo Lizano, La integracion econdmica centroamericana, Lectures No. I 3 (Mexico, F.C.E., 1975), 2 vols. 8 General Treaty on Central American Economic Integration, signed by Guatemala, Honduras, El Salvador and Nicaragua in i960; Costa Rica joined in I962. 9 Central American Agreement on Fiscal Incentives for Industrial Development, adopted by the different countries between 1962 and I969. Each country, since the I95os, also had in operation special laws governing industrial promotion which continued to be applied. This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions 374 Hector Perer Brignoli Table 6. Annual average rates of growth of value added by manufacturing industry (i4-ijr978) (percentages) Guatemala El Salvador Honduras Nicaragua Costa Rica 1945-78 6.3 6.9 5.9 7.7 8.2 i96o-78 6.8 6.7 5.6 7.9 9.I I960-70 7.6 7.8 6.7 10.9 9.6 1970-78 6. 5.8 4.5 4.6 8.6 Source: A rate of growth was obtained fitting the figures in Table 5 to an exponential function. the most dynamic and strongest corporate groups operating in the area - led to pronounced inter-regional imbalance, mainly to the detriment of the most backward countries in terms of industrial base and extent of the domestic market, such as Honduras and Nicaragua. On the other hand, the adoption of a common external tariff for third countries and the replacement of imports by products of Central American origin caused, in a very few years, a serious crisis in government tax resources. By the end of the sixties, it was obvious that the advance of integration demanded changes in the fiscal structure of the countries of the region because, ever since the nineteenth century, the greater part of tax income originated from imports. The adopted solution consisted in the establishment of new indirect taxes (on consumption and sales) as well as in discretionary rises in duties on non-essential goods from third countries.10 By avoiding tax reforms burdening property and wealth directly, a policy of redistribution of income not derived from the free play of market forces was deliberately evaded.11 State revenue was also affected by tax exemptions granted to 'integration' industries and especially by open competition between governments trying to attract the greatest possible number of investments to their respective countries. The successive crises and readjustments of the Central American Common Market (CACM) were due to two separate factors. First of all, there were no appropriate institutional mechanisms to guarantee that decisions would be made in good time to deal with critical situations. None of the countries had conceded the smallest part of its sovereignty to a regional body and, because free trade was chosen, it was market forces 10 The San Jose Protocol, adopted in 1968. For a careful examination of the tax base and the relevant political considerations, see M. H. Best, 'Political power and tax revenues in Central America', in Journal of Development Economics, no. 3 (1976) pp. 49-82. In Costa Rica, the State adopted social policies which had a significant impact on income redistribution. This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions Post-war Central American Economies 375 which took over the pressures and direction of structural change. Under those conditions, no radical change could be expected as far as substantial modifications to the social status quo were concerned. As a matter of fact, business interest groups had a very broad spectrum of action which they used in two different ways: they took as much advantage as possible of the integration incentives and were able to pressurize their own Govern- ments to obtain advantages which, in some cases, were in contradiction to the spirit and the letter of MCC.12 Such dependence by industrialists on 'favours' from the political powers was aggravated by the very process of industrial development. So-called backward linkages were minimal, because, among other things, tax exemptions for raw materials and intermediate products did not promote a substitution of imports in depth - not even at the regional level. Very early on, industries took on a certain degree of 'artificiality' and no structural conditions were created to bring about a self-supporting system of growth capable of gradually eliminating tax exemptions in the future as well as the resulting 'political favouritism'. Towards the end of the seventies, this situation began to change, due to the end of the period of prosperity. The stranglehold by outside forces made itself felt inexorably and caused a reconsideration of the plan for industrialization14 whose consequences have not been fully outlined within the multiple dimensions of the present crisis. The steps followed by the process of import substitution are 'typical'15 12 In practice, each government has tried to protect industry from Central American competition, for which purpose they offer tariff concessions on imported inputs, including those produced in Central America', E. Lizano and L. Willmore, 'La integraci6n econ6mica de Centro America y el Informe Rosenthal', in E. Lizano (ed.), La Integracidn Economica Centroamericana, Lecturas No. 13 (Mexico, I975, 2 vols.). n. 216-47. The reference is to page 237. 13 This refers to the increase in output required as inputs for a given industry. See Albert O. Hirschman, La Estrategia de Desarrollo Econdmico (Mexico, I96I); see also the article by the same author, 'Enfoque generalizado del desarrollo por medio de enlaces, con referencia especial a los productos baricos', El Trimestre Economico, no. 173 (January- March I977), pp. 199-236. 14 Regarding this situation in Costa Rica, see Oscar Barahona Streber et al. Los Problemas Economicos del Desarrollo en Costa Rica (San Jose, EUNED, I980); Helio Fallas, Crisis Economica en Costa Rica (San Jose, Editorial Nueva Decada, I98I). One may note that a large part of this reconsideration is based on the alleged contradiction between import-substitution and export-promoting industries; on the limitations of this pers- pective, see Stefan Robock, 'Una dicotomia falsa: industrializaci6n a travis de susti- tuci6n de importaciones o mediante industrias de exportaci6n', El Trimestre Econdmico no. I55 (I972), pp. 523-43. 15 Adolfo Dorfman, La industrialigacion en la America Latinaj laspoliticas defomento (Mexico, F.C.E., I967). This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions 376 Hector PereZ Brignoli Table 7. Structure of manufacturing industry: relative importance of each sector in the total increase in industry value added between 1960 and 1976 (%) Guate- El Salvador Honduras mala - Industrial Sectors Food, drink and tobacco Textiles, leather and and shoes Wood and furniture Paper and printing Chemicals, rubber, plastics and refining Non-metal minerals other than oil Metals, machinery and equipment Others Total value added Current prices 1970/60 Constant prices Current (970 = prices 1oo) Constant prices Current (1966 = prices x10) I976/6o I976/60 1975/6o 1975/60 40 33 25 47 45 24 21 20 13 12 4 3 4 II 7 5 4 5 5 6 2 19 23 I3 i6 6 4 4 5 9 12 I2 15 6 5 6 2 2 0.4 o I00 100 100 100 100 Nicaragua Costa Rica Constant prices Current (1958 = prices Ioo) Constant prices Current (1970 = prices 1oo) Industrial Sectors Food, drink and tobacco Textiles, leather and shoes Wood and furniture Paper and printing Chemicals, rubber, plastics and oil refining Non-metal minerals other than oil Metals, machinery and equipment Others Total value added 1976/60 47 12 1976/60 45 10 I975/6o 43 I 1975/6o 38 11 4 4 9 9 3 5 i8 I6 4 4 19 22 5 7 4 4 8 I 9-5 12 3 3 0.5 100 100 100 Source: Based on the Yearbook of National Accounts Statistics, 177 (New York, United Nations, 1978) vol. I and SIECA/INTAL, El desarrollo integrado de Centro America en la presente decada (BID/INTAL, Buenos Aires, 1973), part 4. 0.4 100 This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions Post-war Central American Economies 377 Table 8. Composition of imports (%) based on nominal values Guatemala El Salvador 1960 I970 1978 I960 1970 1978 I Consumer goods 26 2 Non-durable 16 3 Durable Io 4 Fuels 5 Raw materials and intermediate goods 6 Construction materials 7 Capital goods 8 Agriculture 9 Industry Io Transport 11 Total 12 Imports by value (c.f. million dollars) Honduras 27 23 34 32 23 I6 14 21 21 i6 11 7 I 37 45 9 '3 II 7 II 5 I 8 32 35 44 38 7 6 6 7 5 5 23 21 27 19 17 26 3 2 3 2 I 2 13 15 I6 II I2 18 7 4 8 6 3 6 100 100 100 I00 100 I00 137.9 295.2 I376.0 122.4 213.6 I02I.0 Nicaragua Costa Rica I960 I970 1978 1960 1970 1978 1960 1970 1978 I 30 31 20 29 30 25 28 28 19 2 19 20 13 i8 20 I6 17 I9 Io 3 II Io 7 II Io 9 II I0 9 4 8 6 12 9 2 II 5 4 9 5 36 33 34 35 38 33 37 38 39 6 5 5 3 5 7 4 8 6 5 7 2i 25 19 I9 24 26 2i 24 27 8 3 4 3 3 2 3 4 2 4 9 i2 14 i6 i2 17 i6 i2 I9 17 10 5 7 I2 3 5 7 5 6 6 II 100 I00 I00 100 100 I00 100 I00 I00 12 71.8 220.7 695.1 71.7 I97-9 596.0 110.4 316.7 II84.5 Source: ECLA, Statistical Yearbook for Latin America, 1971 (New York, United Nations, 1976); idem, I979 (New York, United Nations, 1980). Note: because of the system of fiscal exemptions, it is possible that the rubric 'raw materials and intermediate goods' also includes finished products. This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions 378 Hector Pere. Brignoli I I I I Guatemala ~_ ^^-- ~GDP 1000-- 100_ . O - /xports to CACMe 10 / 1960 1965 1970 1975 I , , . l I, Fig. 4. 'Traditional' exports, exports to CACM and GDP, g96o-1978 (in millions of 1970 dollars) (semi-log scale). within the context of 'very late' Latin American industrialization.16 Fifteen or twenty years after the launching of the process, 40 % of the increases in value added by industry (see Table 7) is accounted for by the food, drinks and tobacco sectors. Chemicals and the metal-mechanical industries are well below that figure at o-o20 %. Textiles (a typical sector in light industry), surprisingly, only achieve importance in Guatemala and El Salvador. Basically this means that the Central American industrial sector manifests a structure which is typical of embryonic import 16 See Albert Hirschman, 'La economfa polftica de la industrializaci6n a traves de la sustituci6n de importaciones en Am6rica Latina', El Trimestre Econdmico No. 140 ( 968), on the question of 'very late' industrialization. For a chronology of the process of industrialization in various Latin American countries, see Ciro F. S. Cardoso and Hector Perez Brignoli, Historia Econdmica de America Latina, vol. z, Economias de Exportacion y desarrollo capitalista (Barcelona, Editorial Crftica, Grupo Editorial Grijalbo, 1979), pp. 191-3. This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions Post-war Central American Economies 379 i I I 1 El Salvador GDP 1000 - r - o r0 o _ ro o_ 'Traditional' exports 100 - - / Exports to CACM V 12- 1960 1965 1970 1975 10 I I I Fig. 4 (cont.). I I i I Honduras GDP - ^~~~- / '~ ~Traditional' 0 a 100 - exports 0 -= c - o0 Exports to CACM 10- 1960 1965 1970 1975 1. I I I Fig. 4 (cont.). This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions I I I I Nicaragua G,DP 'Traditional' exports Exports to CACM 10 2 1960 1965 1970 1975 i I Fig. 4 (cont.). substitution.17 This fact is also reflected in the composition of imports (see Table 8), where there has been a slight decline in the share taken by consumer goods (particularly non-durables), and in the growing importance of capital goods, raw materials and intermediate products. Within the 'typical' pattern we find two peculiarities. In the first place, the CACM made rapid growth of industrial production and export of manufactured goods to the regional market possible during the sixties, but the latter became unstable and weaker in the following decade (see Fig. 4). Although the regional market was essential to the initial industrial take-off, internal consumption of the great majority of goods produced 17 In Argentina, for example, the food, drink and tobacco sectors experienced between 1900 and i929 the same proportionate increase within industrial value added as was observed in Central America between I960 and 1975. Between 1925 and 1948, the most dynamic industrial sectors in Argentina were textiles, transport equipment and machinery. See Carlos F. Diaz Alejandro, Essays on the Economic History of the Argentine Republic (New Haven, Yale University Press, 1970), pp. 214 and 229. 380 Hector Perez Brignoli 1000 cn = 100 -o ~0 cr, 0 C: 0 This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions Post-war Central American Economies 381 I I I l l ,UbL.Ld nH lCG QG?DP 1000 - / ''Traditional' - / exports o 100 - en ' - /Exports to CACM - 10- 1960 I _ Fig. 4 (cont.). Source: ECLA, Statistical Yearbook for Latin America, I975 and I979; Consejo Monetario Centroamericano, Boletin Estadistico, 1969, 1975 and I980. by integration industries also became of primary importance.18 Secondly, the substitution process was soon exhausted, well before the 'coefficient of importsl9 could come down as it did in other Latin American countries; 18 Thus, for example, in El Salvador 79 % of manufacturing output was sold to the home market in 1971. See PREALC, Situacidny Perspectivas del Empleo en El Salvador (Santiago, OIT, 1977, 2 vols.), I, 2I9. In Costa Rica in 1975 more than 80% of industrial production was absorbed by the home market; see Carlos A. Izurieta, ' La concentraci6n industrial en Costa Rica'. Comercio Exterior, vol. 32, no. 12 (Mexico, December I982), pp. 1346-1357. 19 Measured as the rauio of the value of imports to GDP. Compare the following values of this ratio (in percentage terms) with the figures in Table 3. Argentina Brasil Chile Colombia Mexico 1929 I7.8 11.3 3I.2 i8.o 14.2 I939 I0.0 5.6 I2.9 12.9 5'9 1950 7.3 7.3 9.0 11.4 8.0 I963 5.5 4.4 I2.8 8.2 7.0 Source: ECLA, The Process of Industrialization in Latin America, Statistical Annex (Santiago, i966), tables I-5. This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions 382 Hector Perez Brignoli this means that the exhaustion of the import substitution process seen today in the Central American Republics is very different from the one felt, for instance, by Argentina and Brazil in the sixties.20 IV We thought it better to begin by pointing out some of the limitations in the industrialization process due to the nature of integration. The time has now come to question some of the global effects of the CACM on the economic growth of the region. Fig. 4 illustrates the high correlation between the growth pattern of CACM exports and the continuing growth of GDP. One should not forget, however, the behaviour of 'traditional' exports, which also showed a tendency to increase in the sixties and seventies. It is, in fact, impossible to separate the effects of the behaviour of both types of exports on the growth in GDP, given the high level of aggregation of the three types of exports under consideration. Quite an extensive economic literature21 shares the view that CACM yielded net benefits in terms of the growth of the region, with particular reference to the increase in scale economies, savings on foreign exchange and utilization of idle resources (especially manpower). The total amount of benefits ascribed to CACM vary considerably, depending on the premises and methodology used. Whatever the case, any quantitative measure for these net benefits is, in essence, limited: the industrialization and integration processes implied qualitative changes of great significance to raw-material exporting economies, backward and poorly diversified, as was the case in Central America. On the other hand, any measure of net 'well-being' given by CACM involves a debatable counter-factual comparison, if we remember the qualitative nature of the changes just outlined. A further aspect deserves some attention. Evaluation of CACN benefits, obviously situated within a regional perspective, considers industrialization as an instrument within a model where integration ends up being the most 20 On the question of the 'classical' exhaustion of countries such as Brazil and Argentina, see Maria de Conceicao Tavares, 'El proceso de sustituci6n de importaciones como modelo de desarrollo reciente en America Latina', n Andres Bianchi et al., America Latina: Ensayos de interpretacion economica (Santiago de Chile Editorial Universitaria, I969), pp. 150-79. 21 See an excellent summary in W. Cline and A. Rapoport, 'A Survey of Literature on Economic Development in the Central America Common Market', in Cline and Delgado, op. cit. pp. 453-82. This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions Post-war Central American Economies 383 important explanatory variable. But if we change the perspective to the national economies22 the causal order should be different: the industrial- ization process becomes the most important explanatory variable and CACM becomes an instrument: it is an incentive to industrialize by extending the market and promoting exports of manufactured goods. The first perspective predominated in studies of CACM, which is consistent with the interests of integration entities which promoted most of these studies. The second perspective is more realistic, however, and is derived from an assessment by the experts involved in the integration process themselves, and gave them a great deal of trouble as early as the beginning of the seventies :23 the vacuum created by the lack of regional organizations capable of decision tended to widen, and each country - partly because of the imbalances created by the integration process itself- was showing ever-increasing reluctance to yield even normal sovereignty. For this reason, effective integration along the lines of a true 'Customs Union' was more and more relegated to the realm of Utopia. Consideration of two aspects of crucial importance has been left until the end of this section: the role played by foreign investment and the transfer of technology. Under-development- a key element in the Central American economies - can be a relative blessing in disguise.24 In this particular case, however, two elements work against it: (a) the sheer scale of under- development (small fragmented markets, shortage of entrepreneurial skill, minimal technological base, etc.), and (b) a very strong foreign capital presence.25 With minimal government control and protected by tax incentives,26 22 This approach is more logical from the point of view of economic history, since Central America's existence as a supra-national entity is to a certain extent fictitious. 23 See SIECA/INTAL, el desarrollo integrado, op. cit. 24 In the sense used by Gerschenkron, El atraso econdmico en su perspectiva histdrica, trans. S. Labastida (Barcelona, Ariel, I968). 25 See R. Menjivar et al., La inversidn extranjera en Centro America; Gert Rosenthal, 'Algunos apuntes sobre el grado de participaci6n de la inversi6n extranjera directa en el proceso de la integraci6n econ6mica centroamericana', in Karl-Heinz Stanzick and Horacio Godoy (eds), Inversiones extranjerasy transferencia de tecnologia en America Latina (Santiago de Chile, ILDIS-FLACSO, I972), pp. 336-53. 26 Harry G. Johnson provides a terse comment on this situation: 'A manera de ilustraci6n conviene observar que, si la empresa extranjera simplemente reemplaza las importaciones por productos internos, cargando el mismo precio y pagando los salarios corrientes a la fuerza del trabajo interna; y remitiendo los intereses sobre su capital y la renta sobre su tecnologia, por concepto de utilidades, el pafs receptor no ganara nada. De hecho, si la inversi6n extranjera fuese atraida por un subsidio fiscal o arancelario, el pais receptor sufrira perdidas'. (H. G. Johnson, 'Direct Foreign Investment: A Survey of This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions 384 Hector Perez Brignoli foreign investment came in the guise of capital, technology and manage- ment know how packages. These were the main consequences. (a) Tax exemptions made it possible to achieve the highest rate of profit by importing the bulk of material inputs. The substitution of intermediate goods depended infinitely more than that of consumer goods on the guarantee of the regional market and, already by the mid-seventies, the successive institutional crises of the CACM crushed many hopes in that respect. Competition between trade-marks and patents added yet another considerable difficulty to the substitution of inputs. (b) The repatriation of profits put pressure on the balance of payments of all countries in the area, although it did not do so fully until the end of the seventies, when net capital inflows declined (see Fig. 2). (c) The relative decline of national producers in the most dynamic industrial sectors.27 (d) The type of technology used and the structural difficulties involved in the substitution of inputs, which resulted in a very slow increase in employment.28 The latter aspect merits special consideration. Some authors believe it constitutes the main reason for the 'social failure' of integration.29 V An initial measure of the effects of industrialization on employment can be found in census figures for the PEA (economically active population) in industry. Table 9 shows there was a significant increase in that proportion only in Honduras. The effects of the industrialization process and CACM are, then, rather paradoxical: there is an important decrease in the proportion of the PEA in agriculture and, except for Honduras, there is no significant change in the proportion of the PEA in industry. Even in El Salvador, the proportion of industrial jobs in the total PEA decreased by 3 % between I961 and 1971. The increase in urban population and the Issues', Third Pacific Trade and Development Conference (Sydney, I970), cited in Miguel S. Wionczek, 'La invers6n extranjera privada y la transferencia de tecnologia a Mexico', in idem, pp. 493-514. See also Miguel S. Wionczek, 'United States Investment and the Development of Middle America', Conference on Western Hemisphere International Relations and the Caribbean Area (Jamaica, I968). 27 Rosenthal, loc. cit. 28 This contrasts sharply with the classical process of import-substituting industrialization (above all in Brazil and Argentina), where the initial stages are characterized by a high degree of labour absorption. See Maria da Conceicao Tavares, op. cit. p. 169. 29 See Daniel Camacho et al., El Fracaso Social de la Integracidn Centro-americana: Capital, Tecnologia, Empleo (San Jose, Educa, I979). This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions Table 9. Economically active population (PEA): totals in agriculture and manufacturing and by occupation (Figures in absolute PEA in agriculture (%) 68.2 65.6 57.2 63.1 60.3 54.2 83.1 66.7 60.4 67.7 59.6 46.9 53.2 49.1 36.4 and percentage terms) PEA in manu- facturing Er (%) 11.5 io.8 I3.7 II.4 12.8 9.8 5.8 7.7 II.O 11.0 II.4 I .7 12.3 11.0 11.0 I2.0 Self- iployers employed (%) (%) 2.6 5.6 1.2 2.8 1.8 I.3 n.a. 1.4 6.6 n.a. 2.3 2.6 I0. II 3.4 o.8 39.0 25.4 38.5 25.7 21.4 24.9 n.a. 37.8 32.9 n.a. 28. 26.9 10.9 I7.4 i6.3 Source: Population census for each country in given year. Note: A change in criteria explains the lower figure registered by the Honduras census in 1961. Country Guatemala El Salvador Honduras Nicaragua Costa Rica Census year 1950 1964 I973 1950 1961 197I 1950 1961 1974 1950 1963 1971 1950 1963 1973 PEA total 967,814 1,363,669 I,545,658 653,409 807,092 1,I66,479 647,393 567,988 762,795 329,976 474,960 505,445 271.984 395,273 585,313 Wage labourers (%) 40.0 57-5 48.0 55.5 68.2 55.8 n.a. 39.7 44.2 n.a. 56.4 58. 66.4 66. 73.5 Unpaid family labour (%) I8.4 11.3 11.2 12.9 7.6 10.5 n.a. I6.5 14.4 n.a. 12.9 8.9 9-5 10.4 5.9 This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions 386 Hector Peret Brignoli growth of employment in the service industries seem to be directly linked to the process of structural change associated with CACM and industrialization. One must not forget that in the period under consideration the total PEA increase was particularly rapid, and it is obvious that in absolute terms industrial employment rose in all countries.30 The failure to increase in relative terms, therefore, is to be ascribed to the limited capacity of the industrial sector to absorb the PEA increase; the social implications of this phenomenon have varied inversely with the relative population density in each country. What are the causes of this limited capacity? The simple answer is the predominance of foreign investment in the form of packages with technology and management knowhow thrown in. This is only part of the truth, however, as it papers over our understanding of the more profound ramifications of the phenomenon. A surprising fact is that industrialists' strategy for the adoption of technologies is the same for all the nations in the region, whereas each of these has its own particularities with regard to supply of labour and salary scales. For example, we have a significant contrast between Nicaragua and El Salvador, with an abundant supply of cheap labour on the one hand, and Costa Rica with a much more limited supply on the other.31 A detailed study under the auspices of SIECA (Permanent Secretariat of the Central American Integration Treaty) in 1968 revealed an elasticity of substitution between capital and labour 0.8 for the whole 30 According to Cline and Delgado (op. cit. pp. 5 8-64 and 300-39), economic integration appears to have created 50,000oo jobs between 1958 and 1972 (direct and indirect employment effects). This represents some 3 % of total employment and 14% of the total increase in the labour force in the five Central American republics. 31 Enormous difficulties are encountered in obtaining reliable data on unemployment and under-employment. Mention should be made, however, of the valuable surveys carried out by PREALC in the first years of the 197os. PREALC, Situaciony Perspectivas de Empelo en Costa Rica (Santiago de Chile, I973);... Nicaragua (Santiago de Chile, I973); .. .El Salvador (Santiago de Chile, 1973). The ability of the agricultural sector to absorb labour gives a better idea of the scale of the employment problem than the figures on open unemployment. As an example, consider the following estimates (in man-years) for the agricultural sector in Costa Rica (I963), El Salvador (I96I) and Nicaragua (I962): Costa Rica El Salvador Nicaragua Required 188,028 209,339 I97,034 Available 194,309 484,044 279,934 Difference 6,281 274,705 82,900 Source: ECLA, FAO, OIT: Tenencia de la Tierray desarrollo rural en Centro America (San Jose Educa, I973), p. 65. This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions Post-war Central American Economies 387 of the region.32 This implies a 'bias' in technological change against labour: for instance, an increase of 0o % in the cost of capital should lead to an increase of employment of 8 %. Although calculation of the elasticity of substitution involves many theoretical and practical difficulties, the final result (considered valid in the long term and ceterisparibus) is not without interest. Recommendations for a more appropriate policy to raise employment, in this context, seem to involve an increase in the cost of capital and a rationalization of the selection, transfer and adaptation of technology.33 There is another element: Central American industries - and here again, there are very few differences between the countries - operate well below installed capacity.34 This fact supports the argument over the cost of capital that technological 'packages' have nearly always been already amortized by the patent-holding companies who, furthermore, enjoy especially advantageous tax exemptions. Under the conditions described, production below full capacity may be consistent with particularly high rates of profit. There is another justification for the choice of labour-saving technology apart from that of labour costs. In a country such as Costa Rica, where there is a limited supply of labour, a trade union movement35 and a high level of social security contributions, the choice is consistent with the most logical principles of a free market economy. In Guatemala or El Salvador, however, where the labour market is more flexible and wages lower, industrialists appear to show no interest in labour-using technology; furthermore, limited choice of technique and the low relative cost of capital (due to tax exemptions) added to a threatening social climate are no 32 Charles Frank, Max Soto y Carlos A. Sevilla, 'The Demand for Labor in Manufacturing Industry in Central America', in Cline and Delgado, op. cit. pp. 125-80. In Costa Rica, unlike the other Central American countries, no difference appears in the elasticity of substitution when comparing traditional and 'dynamic' industries. See op. cit. pp. 148-9. 33 Idem. p. I70. 34 See SIECA, ElDesarrollo Integrado... Annex 3, Desarrollo Industrial Integrado, pp. 28-3I and Tables 13 and 14 of the Appendix. 35 One should note that participation in trade unions is much more important in Costa Rica than in the rest of Central America. However, excessively aggregated figures on this participation (such as those found on pp. 187-9 in Clark W. Reynolds and G. Leiva, 'Employment Problems of Export Economies in a Common Market: The Case of Central America', in Cline and Delgado, op. cit.) hide a more complex situation. In 1973, only 5.I % of the industrial labour force was in trade unions. By contrast, the propor- tion of service employees in trade unions (mainly in the public sector) was 4I % while in the case of transport workers it was 36%. See O. Cuellar and S. Quevedo, 'Condicionantes del desarrollo sindical de Costa Rica', Revista de Ciencias Sociales (Universidad de Costa Rica), No. i5-I6, (I978), pp. 57-I08, in particular table II. This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions 388 Hector Pereq Brignoli incentive for more intensive use of labour.36 In simpler terms, an industrialist may find it cheaper to employ a greater number of workers than to pay for machinery of a certain sort, but the risk of social conflict resulting from an increased payroll may represent an even more powerful incentive to opt for the machinery. Industrialists who favour the adoption of labour-saving technology are under pressure from additional factors such as the low level of skill of the work force and difficulties in the repair of machinery.37 The latter is due to the weak base in small-scale production of spares and tools, which, for reasons of efficiency and cost, makes it preferable to replace the machinery.38 The above explanations focus on the behaviour of industrialists, the determinants of foreign investment and the import of technology. It could be argued in more dynamic terms that the slow rise in employment in manufacturing industry is rather the result of the rapid exhaustion of the process of import substitution. A comparative examination of the evolution of industrial employment according to occupational categories in El Salvador and Costa Rica (see Table i o) provides some interesting considerations. In Costa Rica, where there is a limited supply of manpower and labour costs are relatively high,39 evolution follows the typical pattern of capitalist development: the numbers of employers and self-employed decrease along with those of unpaid family labour, whereas the numbers of salaried workers (85.7% of total employment figures in industry in 1973) increase 36 See Gabriel Aguilera Peralta, Jorge Romero Imery et al., Dialectica de Terror en Guatemala (San Jose, Educa, I98i). Since the middle of the I970s, the journal ECA, Estudios Centroamericanos, published in El Salvador by the Jose Sime6n Canias Central American University, has provided solid documentation on the violence and repression in El Salvador. 37 The illiteracy rate in the population over I5 years of age is sufficiently illustrative: I960 I970 Costa Rica 15.6 I .6 El Salvador 5 .o 43. Guatemala 62.o 53.8 Honduras 37.0 43.o Nicaragua 50.4 42.1 Source: Statistical Abstract of Latin America (James Wilkie ed.), vol. 9 (1978), table iooo. 38 Cline and Delgado, op. cit. pp. 166-7. Low interest rates were combined with fiscal incentives. 39 The labour force in Costa Rica enjoys an educational and skill level well in excess of the Central American average. On the response of the public sector through the educational system to development demands see Hector Gertel 'Economic Fluctuations, the State and Educational Reform Movements: the Case of Costa Rica, I850-1900' (Ph.D. thesis, Stanford University, May 198I). This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions Post-war Central American Economies 389 substantially. In El Salvador, however, a surplus of labour radically changes the pattern of evolution: the number of self-employed do not tend to decrease (they represented 30% of the industrial labour force in 1971) while there is a slight decrease in the proportion of salaried workers during the period of industrial expansion (I961-7I). The composition of Table o. Economically active population in industry classified by occupation in El Salvador and Costa Rica (%) Self- Wage Family Country Year Employers employed labourers labour Other El Salvador 1950 4.8 30.8 55.5 5.3 3.5 1961 3.I 26.4 65.5 2.6 2.3 1971 i.6 29.9 63.9 3.9 0.7 Costa Rica I963 3.7 19.5 71.2 2.9 2.7 1973 I.o 12.4 85.7 0.9 Source: Population census for El Salvador and Costa Rica in given years. Note. In 197I, the census in El Salvador only broke down the occupational status of the employed labour force and not that of the total industrial PEA. In that year, therefore, the figures given in the table were calculated by applying these proportions to the total industrial PEA. this sector of self-employed labour is heterogeneous: it covers the informal sector of manufacturing industry and a whole group of under-employed,40 but it also includes an important number of sub-contracted workers, particularly in textiles, clothing and footwear, who depend directly on manufacturing industry. The abundance and low cost of labour seem to create, given the cost of capital and the ease with which technology can be imported, a 'vicious circle' effect which reproduces 'pre-capitalist forms'. The rapid exhaustion of the import substitution process seems to represent a key point for consideration in any attempt to clarify the matter of the slow increase in industrial employment. An attempt will, therefore, be made to sketch out a more general explanation. VI The model of economic growth adopted from the end of the fifties combined import-substituting industrialization with Central American integration. In what follows we will examine the differential impact, with 40 See PREALC, Situacidny Perspectivas del Empleo en El Salvador (Santiago de Chile, OIT, 1977, 2 vols), i, 151 onwards. This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions 390 Hector PereZ Brignoli reference to two points: regional imbalances and social distribution of the benefits of the progress achieved. The conflict between Honduras and El Salvador in 1969 and the with- drawal by Honduras from the CACM in the following year were mostly the result of disparities in regional development aggravated by the plan for free trade, which was part and parcel of the integration process. The war had a wide variety of causes but, whatever the cause, it revealed how incapable Honduran companies were to obtain concessions and guarantees within the plan for CACM.41 Honduras had to face serious deficits in its trade balance with Central America, and with El Salvador since 1966 in particular. In March 1969 the Honduran Government registered two complaints:42 one fiscal, in that government revenue had decreased, and the other that 'consumers were being penalized' by high prices and the poorer quality of Central American products. Honduras left the CACM in 1970 when it failed to obtain appropriate compensation. It is symptomatic that the Honduran Government's arguments were far from being in support of national industry. During the phase of sharpest conflict with El Salvador, in the months of June and July 969, Honduran industrialists were not indifferent to the anti-Salvadorean campaign,43 but there is something no one has yet explored, and that is the possibility of another, at least potential source of conflict; the possible penetration of Salvadorean capital into the Honduran economy.44 Somoza's Nicaragua had to face a similar situation at about the same time. In this case, however, State reaction was quick and effective in obtaining a guarantee of Nicaragua's successful continuation within CACM.45 The wide powers of the Somoza dynasty were not uninvolved, of course, nor their capacity for taking part in the 'benefits' of integration, following the example of the dominant class in Guatemala and El Salvador. 41 See James Rowles, El conflicto Honduras-El Salvadory el ordenjuridico internacional (1969) (San Jose, Educa, I980); Marco Virgilio Carias y Daniel Slutzky (ed.), La guerra inttil (San Jose, Educa, I971). 42 The official Honduras text presented by the Minister of Economy, Manuel Acosta Bonilla, before the seventeenth meeting of the Consejo Econ6mico Centroamericano, 20-22 March 1969, is given in Carias and Slutzky, op. cit. pp. 11-122. 43 Jacobo Waiselfisz, 'El comercio exterior, el mercado comiun y la industrializaci6n en relaci6n al conflicto', in Carias y Slutzky, op. cit. pp. 167-240, in particular pp. 20z-3. 44 Note, for example, the existence of Guatemalan and Nicaraguan investments in El Salvador: Eduardo Calindras, Fundamentos Economicos de la Burguesia Salvadorena (San Salvador, UCA, 1977), table 25 in the Annex and of Costa Rican, Salvadorean and Nicaraguan investments in Guatemala: Rene Poitevin, El Proceso de industrialigaci6n en Guatemala (San Jos6, EDUCA, 1977), p. 276. 45 In March 1969 Nicaragua introduced customs duties on regional imports, which clearly violated the General Treaty. After intensive negotiations, Nicaragua slightly modified her policy. See Rowles, op. cit. p. 41. This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions Post-war Central American Economies 391 In brief, it can be asserted that: (i) CACM was introduced in five nations with marked differences in the level of development,46 and the adopted integration scheme did not take into account, nor did it consider, any correction to regional imbalances; (2) any revision of national participation in CACM then depended greatly on political ability to react to a situation Table I. Quality of Life and Income Per Head (I140-78) (A) Index of the quality of life: Health, education and communications 1940 1950 1960 1970 Costa Rica 69.3 65.8 60.9 57.2 El Salvador 79.9 78.8 74.1 69.7 Guatemala 83.8 81.2 79.1 77.0 Honduras 82.9 8 .o 77.2 71.7 Nicaragua 80.3 76.9 73.3 68.9 Latin America 73.9 73.8 68.6 63.7 Note: The index varies from o (equivalent to the level in the U.S.A.) to Ioo. It is based on 2 indicators: life expectancy at birth, infant mortality hospital beds per person, doctors per person, dentists per person, illiteracy among those over I 5 years, proportion of children aged 7 to 14 enrolled in primary schools, proportion of children aged 1 3 to i8 in secondary schools, enrolment in higher education as a proportion of enrolment in primary schools, number of newspapers per oo000 inhabitants, number of telephones per oo00 inhabitants, number of inhabitants per cars registered. The indices for all Latin America have been weighted by the population in each country. Source: Statistical Abstract..., vol. 21, tables o00 and 10I. (B) Income per head (in 1980 dollars) 1950 1960 I970 1978 Costa Rica 347 474 656 879 El Salvador 265 319 397 463 Guatemala 293 322 417 575 Honduras 232 250 289 290 Nicaragua 2 5 2 71 354 412 Latin America 396 490 648 824 Source: idem, table 2201. of disadvantage, such reaction involving joint action by industrial interests and the government in each country. How were the benefits of economic growth socially distributed? We shall confine ourselves, on this particular question, to an examination of the behaviour of a quality-of-life index and of per capita income (see 46 See Delgado, 'Institutional Evolution... ' in Cline and Delgado, op. cit. pp. 43-8. Using various indicators on the level of social and economic development this demonstrates the remarkable progress of Costa Rica with respect to the rest of Central America. This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions 392 Hector Perez Brignoli Table II).47 A very obvious regional contrast may be observed between Costa Rica and the rest of Central America, supported by the long-run trend in both indices. If we re-examined the high rates of growth for the region in the same period (see Table i), the obvious conclusion is that there seem to be two separate models of economic growth: one, applicable to Guatemala, El Salvador, Honduras and Nicaragua, of growth for the few, and another, to Costa Rica, of growth for a wider spectrum of the population. It is worth noting that the marked difference between these growth models is not due to the industrial sector nor to the particular circumstances of each country's integration into CACM but to: (i) the structure of the agricultural export economies in the second half of the nineteenth century,48 and (2) to the success and extent of the reformist policies implemented after the Second World War. It is not possible to delve further into the disparities relevant to the first aspect within the terms of this article. Suffice it to say that they profoundly affected the second aspect, in so far as in Costa Rica alone was a reformist policy of any significant scope implemented effectively.49 The nature of CACM and of the industrialization process limited Costa Rican reforms to the domain of the public sector and social policy (education, health, social security, and so forth). The State's field of action was vast and increased considerably thanks to the economic prosperity of the fifties and the sixties. At the end of the seventies, however, the limitations of the plan became evident, within a general economic situation that was becoming ever more critical. An attempt to continue reformist policies through the Entrepreneurial State gave few positive results.50 Let us now examine the nature and scope of the crisis now affecting the Central American economies, particularly since 1978. 47 The index employed has the advantage of making use of indicators of the quality of life, which are based on relatively reliable data. The existing information on the distribution of income is very fragmented and difficult to interpret. On the other hand, one should note that the reliability of data derived from samples and surveys depends strictly on the methods of data collection, processing, analysis and presentation. It would be naive to suppose that there is no political influence over these methodological choices and the dissemination of the results. 48 Going back even further, there are important contrasts which originate in the colonial period. 49 The reformist policies in Costa Rica have been applied since 1948 as part of a broad social democratic process. There have been important steps in this direction, however, since at least the First World War. See Jose Luis Vega Carballo, Poder Politicoy democracia en Costa Rica (San Jose, Editorial Porvenir, 182); Jorge Rovira Mas, Estadoy Politica Economica en Costa Rica, I948-I970 (San Jose, Editorial Porvenir, I982). 50 Mylena Vega, El Estado Costarricense de I974 a 1978: Codesay la fraccion industrial (San Jose, Editorial Hoy, I982). This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions Post-war Central American Economies 393 VII One of the most striking aspects of the crisis is its general character. It affects five countries of the region and has economic, social and political dimensions, which implies that common structures and situations help to explain the situation. However, the strong disparities in social development evidently have an important part to play, not only in the evolution of the crisis, but also on the possibilities of overcoming it. Table 12. Gross fixed capitalformation (as percentage of GDP at current prices) El Guatemala Salvador 9.8 9.9 13.1 1 3.7 13.5 12.5 13. 13.0 14.0 I4.8 15.7 20.3 I4.4 12.0 14.9 io.8 II.5 12.0 13.3 16.4 15.6 18.2 21.2 20.0 Honduras Nicaragua Costa Rica 12.4 12.8 i6.i 14.9 15.3 i8.2 13.0 18.8 i8.6 17.4 15.6 17.2 i8.1 16.9 I8.I 19.I 16.4 19.5 I6.9 15.5 22.I 15.1 15.1 21.9 17.8 19.3 22.2 20.0 23.2 24.0 21.6 22.6 22.0 22.2 19.2 22.0 Source: Based on The Yearbook of National Accounts Statistics, I977 (New York, United Nations, 1978), vol. I. On an economic level, the crisis in the Central American economies appeared around 1978-9 as a typical consequence of the external situation: a decline in prices for traditional exports (especially coffee) and deficits in the balance of payments. At the second stage, the contraction affected inter-regional trade and industrial production.51 However, the crisis was far from being a temporary hiccup and soon revealed that it had structural roots. 51 The percentage changes in GDP were the following: El Costa Guatemala Salvador Honduras Nicaragua 4.3 -I.6 3.4 -9.0 I.0 -9.5 1.0 - 10.0 6.8 -21.5 1.3 10.7 1.7 8.9 1.5 2.5 Source: ECLA and various estimates (INIES, CRIES, Managua, octubre 1982). I960 I963 I965 1968 1969 1970 I971 1972 '973 I974 I975 1976 1979 1980 1981 1982 Rica 3.3 --.7 --3.6 -2.4 This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions 394 Hector Pere. Brignoli Table I 3. ICOR (Incremental Capital Output Ratio) in agriculture and industry, and contribution of these sectors to GDP (in percentages) Agriculture's Industry's ICOR share of GDP ICOR share of GDP agriculture (%) industry (%) Guatemala 1960 5 30 z8 3 I963 5 3I 3? I3 I965 6 29 35 14 1968 4 28 42 I6 1969 4 27 41 I6 I970 4 27 40 I6 1971 4 28 37 I6 I972 4 28 36 I6 1973 4 29 35 I6 1974 4 28 34 I6 1975 4 28 35 5 I976 4 27 43 I6 Honduras I960 12 31 I6 II I963 14 32 7 12 I965 13 35 20 II 1968 I4 33 34 12 1969 5 31 20 I2 1970 I8 30 I9 I3 I97I I6 6o 17 I3 1972 5 3? I5 3 1973 17 31 I8 14 1974 19 29 I7 14 1975 19 27 i8 I5 El Salvador 1960 5 32 I4 15 1963 4 31 3 I6 I965 3 29 20 I8 I968 2 26 12 20 1969 2 25 I3 20 1970 2 28 I4 I9 197I 2 27 14 i9 1972 3 25 19 20 I973 3 28 n.a. n.a. 1974 3 25 n.a. n.a. Costa Rica I965 9 24 23 17 1968 12 23 i6 17 1969 I 23 I9 I8 1970 13 23 2I I8 197I 14 20 I9 I8 1972 0o I9 21 I8 1973 8 19 26 I9 1974 9 I9 23 20 1975 7 20 19 20 Source: Yearbook of National Accounts Statistics, 7977 (New York, United Nations, 1978), Vol. I. The figures are based on nominal values, except in the case of Guatemala where constant prices are used ( 9 5 8 = ioo). Note: The ICOR has been calculated as the coefficient-ratio between gross fixed capital formation and value added, and for convenience has been expressed as percentages; thus, an ICOR of 9 implies that this number of units of fixed capital are required to increase value added by Ioo. This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions Post-war Central American Economies 395 The rapid exhaustion of the import-substitution process is due, in the final analysis, to weak backward linkages, by which we mean a limited industrial capability and production base. It is now appropriate to locate the causes of this lack of dynamism within the process of industrialization itself. The stumbling block does not seem to be due to supply factors (availability of capital, labour and technology), although there are some bottlenecks with respect to certain kinds of labour. If the Central American nations were successful at all, it was in attracting investment, mostly from abroad, as well as technology. Available figures on gross fixed capital formation (Table 12), reveal (thanks to the growing proportions of GDP allocated to it) a sustained rate of capital accumulation,52 and we have already seen that there was an ample supply of under-employed labour. It is essential, however, to clarify the direction and profitability of investment. Table 3 helps us to do that, where we see incremental capital output ratios (ICORs) for agriculture and industry, as well as the contribution of value added to GDP in those sectors. The most salient point in Table I3 is the very marked contrast between ICORs, which are relatively low for agriculture and high for industry. The industrial picture could partly reflect the relative scarcity of capital goods, which in principle causes higher prices for machinery. This would be typical of any backward country at the outset of industrialization.53 With respect to profitability, the agricultural sector everywhere seems to enjoy considerable comparative advantages due to factor endowments (availability and quality of land, availability and cost of labour).54 Even from a short-term point of view, industry might seem to be a low- profitability activity because of its low contribution to GDP, as well as a mistaken option as part of a development strategy. Value added per worker (see Table 14), however, reveals that in the industrial sector productivity is three or four times that of the agricultural sector. Let us now examine the evolution and composition of demand. Although it was at the expense of regional imbalances, CACM widened the market for consumer goods, albeit short-lived. The absence of 52 Kuznets has studied the limits to the variation of this rate over the long run, using advanced country data. Only occasionally does it exceed 20 % of GDP and at times falls below o %. See Simon Kuznets, Croissance et structures economiques (trans. A. Nicolas, D. Prompt and J. Soichot) (Paris, Calmann-Levy, 1972), pp. 5 5-63. 53 Cf. Alexander Gerschenkron, op. cit. 54 The ICOR for agriculture in Honduras and Costa Rica is much higher than in Guatemala and El Salvador. This reflects the importance of plantation agriculture in the former countries, which in turn implies a more intensive use of fixed capital in the agricultural sector. This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions 396 Hector Perez Brignoli Table 14. Values addedper worker (I960-76) (in constant dollars) Agriculture Industry All sectors Guatemala (at 1958 prices) 1960 381 995 837 I968 486 I442 1089 I97I 551 1481 1183 1976 684 I707 1456 El Salvador (at 1962 prices) 1960 377 833 746 1968 456 887 913 I971 488 938 979 I976 5i6 977 II05 Honduras (at 1966 prices) 1960 315 975 703 1968 425 1197 8Io I97I 410 I284 8i8 1976 355 1414 837 Nicaragua (at 1958 prices) I960 485 1492 930 1968 629 2575 1399 I971 699 3020 I456 I976 782 3498 I751 Costa Rica (at 1966 prices) I960 722 I776 I476 1968 843 2638 1687 1971 979 3I24 i906 1976 836 3410 1837 Source: Value added taken from Yearbook of National Accounts Statistics, I977 (New York, United Nations, 1978), Vol. I; data on the labour force: for 1960, I968 and 1971, estimates were made by SIECA and published in Cline and Delgado (ed.), op. cit. pp. 606-7. The 1976 figure is based on a projection using a linear trend derived from the data for 1960, 1968 and 1971. structural change in the rural area, which encompassed in 1975 65 per cent of the Central American population, proved to be in the medium term a doubly decisive factor: through its role in the determination of income distribution and in the size of the home market, and through the revolutionary potential of the oppressed rural masses. In other words, industrialization without structural change in agriculture, and with limited domestic and foreign markets, was doomed to failure, and this is exactly what has happened in Guatemala, El Salvador, Honduras, and Nicaragua, where the economic crisis was mainfestly preceded by various forms of social rebellion and far-reaching political upheaval. This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions Post-war Central American Economies 397 A comparison with the case of Costa Rica is again useful. Expansion of the domestic market in that country was guaranteed by (a) the basic structure of the agricultural export sector and (b) the growth of the public sector (rise in employment and consumption, redistribution of credits through the nationalized banking system).55 In relative terms, the second aspect seems to have been more decisive than the first as a dynamic factor in social development over the period in question. To summarize, reformist policies in Costa Rica made it possible to guarantee the expansion of the domestic market in spite of industry's weak backward linkages and of the early exhaustion of the import- substitution process. However, the solution depended greatly on the general situation abroad (especially on net capital inflows and the prospects for external indebtedness, taking into account the pronounced deficit in the trade balance), which precipitated the crisis after 1979-80 at a rate and depth greater than for other Central American countries.56 The greatest challenge for the Costa Rican economy is how to increase employment, essential to social participation and political democracy, without harming productivity, an indispensable condition to ensure economic development in the long term. In the other countries of Central America the model of economic growth without income redistribution or structural change that would favour the majority of the population became complicated by social rebellion and political upheaval. It is obvious that political crisis which seems to precede economic crisis in those countries is, in fact, a delayed reaction to the economic growth model itself. The main challenge facing those countries consists to a large extent of building a new type of society. The present crisis in the central American economies is, without doubt, related to the sombre international picture prevalent since the mid-seventies. The importance of the external sector can never be stressed enough, particularly in the case of the open economies such as those we have been examining. But the direction, depth, and scale of the crisis, as well as the possibilities of overcoming it, derive more than anything else from the twenty-five years of prosperity in the post-war period. It is obviously so 55 The agricultural export sector in Costa Rica is distinguished by a high level of labour absorption. The dominance of small and medium-size farms in the coffee sector and the widespread use of wage labour in the banana sector have ensured since the nineteenth century a very broad internal market. Among the new export activities which have developed since the 195 os cattle-raising is distinguished by its low levels of labour absorption. 56 With the exception of Nicaragua in 1978-9, engulfed by the popular revolt which brought to an end the bloodthirsty dynasty of Somoza in July 1979. This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions 398 Hector Pere. Brignoli in the case of Costa Rica, where the crisis demonstrated the limitations of a 'reformist' model. As far as the rest of Central America is concerned, social rebellion would be unintelligible without the socio-economic changes brought about by that prosperous phase. The boom multiplied the inequalities, but it also created the material foundations for a new type of political mobilization. This content downloaded from 163.178.101.228 on Thu, 8 May 2014 09:58:24 AM All use subject to JSTOR Terms and Conditions