Central America shares many qualities with its southern neighbors, a critical need for better education, new infrastructure and corresponding investment, among them. However, the region’s pursuit and relative success of integration makes it stand out — especially as South America as a whole continues to reel from global troubles that include declining commodity prices and China’s economic slowdown.
After the Central American Common Market, a free-trade zone, was established in 1960, trade between the countries in the region flourished, eventually accounting for roughly half of exports and imports by the early 1980s. Even now, this intra-regional trade in Central America far outpaces the rest of Latin America, where China, the US and Europe are the predominant partners.
Compared to the European Union, which conducts about 70% of all of its trade within its borders, there is room to grow, Nick Rischbieth, executive president of the Central American Bank for Economic Integration, tells LatinFinance in an exclusive interview. Infrastructure development is imperative to fostering more trade within Central America, he says. Behind all of these lofty objectives, however, is the need for better education to provide a more sophisticated, capable workforce that can boost incomes. Panama, which boasts the region’s international financial center and Costa Rica, home to a relatively solid education system, are examples of how the quality of human capital can lift national fortunes. This is an edited transcript of Rischbieth’s conversation with LatinFinance.
LF: What are the broad themes that have characterized Central America transformation in the past 50 years?
NR: We were founded around 1960, which coincides with the General Treaty for Central American Integration. We actually commenced operations six months before the whole thing started. That’s when Central America starts to change. There’s a number of decisions that were made in the 60s. One was the creation of the Central American Common Market, the idea of establishing a free-trade zone, of creating a general system of tariffs. We’re all small countries with small populations. The central idea is to try to create a customs union.
LF: What are the main themes that happened between the 60s and now?
NR: For us, obviously the most important theme is the integration of Central America as an economic unit. Trade started to flourish in Central America from basically nothing in the 60s to a very substantial amount in the 1980s. Thereafter, we start having internal conflicts. Nicaragua, Guatemala and El Salvador all had different internal conflicts. We did have bloodshed and these revolutionary situations. Trade actually falls substantially by more than 50%. After that, a peace process starts around 1985, which culminates in the re-launching of the Central America integration system in the early 90s. This relaunching actually leads to the current situation. Whereby, currently about 25% to 35% of the trade to Central America is actually within itself.
This contrasts with the rest of Latin America. Our main trading partner is the US, but our second main training partner is ourselves. Most South American countries, their main trading partner is either Europe, Asia or the US. The amazing fact is that there’s very little commercial trade within South American countries. In Europe, they started their integration process after Central America, but they did it much quicker. Their trade is 70% and 80% between themselves. If you ask me about the main feature of these last 50 years, it’s the economic integration of Central America. We’ve gone from 0% to 26%. The challenge is trying to increase that.
LF: What has been Cabei’s role in this development and integration?
NR: Reconstruction and development are usually the main themes. We’re the only development bank in the world that actually has the name ‘integration’ written into it.
This is important from the context. In terms of commercial openness with trade, Central America has very open economies. There’s an index that has to do with trying to measure that opening and in case of Central America, it’s close to 60%. South America is much lower around 40%.
The other thing that’s important are the inroads that Central America has made with regards to infrastructure. The bank is instrumental in that process. There’s a lot more that has to be done. Countries should be spending 6% of GDP in infrastructure and most economies, especially in Latin America, spend not even 2% in a lot of cases. We share that feature with Latin America. Most countries spend too little on infrastructure.
Other economies such as China, spend upward of 8% to 10%. I think India spends around 6% to 8%. That’s what you have to do in order to try to transform Central America and compete with the rest of the world. You definitely need better infrastructure, which means roads, ports and airports. About 30% of our lending goes to that area.
LF: What other areas does Cabei focus on and devote resources to?
NR: The other area that’s important for transforming Central America is energy. Something like 60% of our lending is infrastructure and energy. The demands of the region are much larger than that. Even though our role has been important, the region needs a lot more investment in those two areas to try and transform themselves into higher income economies.
Transforming Central America is not something that can be done overnight. Becoming a high income country is a large feat and a daunting task. I think it can be done. If you look at Central America, we have four countries that are low and middle income economies: Guatemala, El Salvador, Honduras and Nicaragua. Then you have Costa Rica and Panama that are high middle income. Costa Rica has tried to get into the OECD, in order to do that, you need to be a high income country.
I’ve heard that Costa Rica will be accepted in July of next year as an OECD country. Costa Rica is trying to get into that exclusive club. If that really happens, it means that this is feasible to try and come out of poverty and become a high-income country.
LF: What has enabled Costa Rica to make that leap?
NR: Well for Panama, that’s been the Panama Canal, Panama has a financial center, the ports there. The main message is that Costa Rica, for 30 years has been either number one or number two in terms of investment in education as a percentage of GDP. We’re talking about over the past few decades.
That’s something that the rest of Central America should be doing, if they really want to improve. Someone asked me what’s the first thing you need to do in order to be a high income country? Education is number one, education is number two and education is number three. Costa Rica has done this and the rest of Central America hasn’t done this.
Also, Costa Rica doesn’t have a military. They abolished it in the 20s or 30s. If you don’t have a military you can spend the money on education. Whatever you’re spending on the military and spending it on education, if you do that for 30 years, I’m sure you’ll have small tigers, like in Asia.
LF: Why is integration so important?
NR: Integration is important, because these small countries with populations of 5 million or 8 million or 10 million, they’re much too small to make a difference by themselves. It has to be a region. By themselves, Costa Rica and Panama are the exceptions, I don’t think they’re capable of transforming these economies without acting as a region.
Combined, together, they are a lot more important. Instead of a population of 5 million to 10 million, we’re talking about 40 million. We’re talking about a GDP of around $157 billion, about commercial trade of about $86 billion. Without the economies of scale, I think it’s very hard to actually try to create the conditions for sustained growth over a long period of time.
LF: What are the keys to growth going forward?
NR: You have to expand and consolidate the process of integration. You have to continue to amplify and modify your infrastructure. You have to continue to spend your money on education. You have to up your human resources and invest strategically in education and health. Those are the things that Central America has to do to move forward. There’s a number of other things that need to happen. These countries have been singled out as countries where there’s high-level corruption. You need to take measures in those areas. You lose 1% of GDP in terms of growth every year if you have high levels of corruption and you need to attack that as well. LF