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Worsening global outlook threatens fragile Central American democracies
The Tico Times / February 27, 2009

By Larry Luxner

WASHINGTON — The fledgling democracies of Central America — already challenged by weak judicial systems, overburdened bureaucracies and rising gang violence — now have a new worry to cope with: economic disruption caused by a falloff in crucial factory exports and a sharp drop in family remittances from the United States.

That's the conclusion of a panel of experts who spoke at a Washington gathering last week entitled "Democracy in Central America: How Strong?"

The event, organized by the nonprofit Hudson Institute, attracted 130 people and brought together La Nacióncolumnist Jorge Vargas, a professor at the University of Costa Rica; Anne Krueger, former IMF official and now professor of international economics at Johns Hopkins University; former State Department official Caleb McCarry, and John Walters, former director of the White House's Office of National Drug Control Policy.

"Today, the influence of Venezuelan President Hugo Chávez and his brand of populism, Iranian adventurism, organized crime and drug trafficking, and the worldwide economic downturn are endangering democratic gains in Central America," warned Jaime Daremblum, Hudson's director of Latin America programs and the event's moderator.

"In Nicaragua, President Daniel Ortega has tied his country to the radical populism preached by Chávez. In El Salvador, the leftist FMLN seems poised to win the presidential elections in March," said Daremblum, who served as Costa Rica's former ambassador to the United States before joining Hudson as a senior fellow.

"In Honduras, President Manuel Zelaya has linked his country to ALBA, the trade association of countries in Venezuela's orbit. Meanwhile, Guatemala continues to be torn apart by violence from organized crime. In light of this potential regression into authoritarianism, democratic institutions seem increasingly threatened."

But the picture varies widely throughout Central America, whose seven countries cover 324,000 square miles, comprise 41.3 million people and have a combined GDP of $107 billion.

Vargas pointed out that "except for Costa Rica and to some extent El Salvador, the rest of the countries rank among the worst in terms of unequal distribution of income in Latin America, a region already noted for unequal distribution of income," said Vargas, noting that annual per-capita GDP ranges from $4,792 in Costa Rica and $4,769 in Panama to a low of $863 in Nicaragua. In four Central America countries — Guatemala, Honduras, El Salvador and Nicaragua — per-capita GDP is now below that of India.

Vargas, director of the annual "State of the Region" report, said Central America has gone through a number of key transitions in the last 20 years, among them authoritarianism to democracy, war to peace and closed to open economies.

"Central American societies are no longer rural but urban societies, and with that comes the challenge of how to deal with populations with rising expectations," he said. "The last municipal elections in Nicaragua were blatantly fraudulent — the first fraudulent process since authoritarianism was vanquished in the region. In most countries, even the ones that have not dared to perpetrate fraud, institutions are politicized and partisan. The situation is worse in Nicaragua, but El Salvador should be watched closely too."

Overall, said Vargas, "all Central American countries have weak or nonexistent regulations for private funding of political parties, and everywhere in the region, political parties are in deep trouble. The worst case is Guatemala, and the rule of law and accountability is particularly weak in Honduras." He added that "most countries in the region are unable to show substantial progress in establishing the rule of law and accountability over holders of political power. There is rampant corruption and mismanagement of resources."

Walters, who served as the Bush administration's "drug czar," told participants that Central America's main problem is that "the basic institutions of justice have been inefficient." He pointed to armed gangs in Mexico and El Salvador, and the dramatic surge in drug-related violence throughout the region. "They have not been accessible to many people in these countries, and they don't protect individuals even when it's most needed."

One indication of this is the amount of money Central American countries spend on their judicial systems — less than $10 per capita annually in Guatemala, Honduras, Nicaragua and Panama, according to Vargas. The figures are better for Costa Rica ($29.90) and El Salvador ($23.70). And in both Panama and Nicaragua, there are fewer than two public defendants for every 100,000 inhabitants.

"As the first decade of the 21st century comes to a close, the region faces real risks of state failure in some cases," he said, suggesting that Costa Rica and Panama might even form a G-2 mini-bloc to protect themselves from their poorer neighbors. "As a Central American, I am bracing myself for dangerous times."

Krueger's outlook isn't very reassuring either.

Citing a recent World Bank study on the ease of doing business in 180 countries, she said Central America showed "truly discouraging results" that do not bode well for the region's short-term economic future.

"Panama ranked 81st on the list, and Panama was the best of them. Nicaragua was next-best at 107th, Guatemala ranked 112th and Costa Rica 117th," she said. "When it came to protection of investors, Costa Rica was 164th. Costa Rica has obviously done very well in the past, but lately has fallen behind. Finally, Honduras ranked 133rd. With those numbers, no matter how good the economy is, it's still going to be a problem. The picture is not a good one."

Small size and distance from main markets is no excuse for poor economic performance, she said, pointing to Singapore and New Zealand as prime examples of successful economies that are relatively small and far away from centers of population.

"Between 2002 and 2006, the world economy never had it so good," said Krueger. "Those are years in which the prudent policy would have been to run fiscal surpluses in the good years, so there would buffers in the bad years. Yet Central American countries all ran deficits every year from 2002 to 2006. That means they gave away whatever latitude they might have had to better cope with the economic difficulties we're all having now."

The impact of the U.S. financial crisis on Central America cannot be measured yet — though one early effect has been a drop in family remittances. In Mexico, the largest single recipient of wire transfers and other cash payments from the United States, remittances have fallen 12%, from $24 billion in 2007 to $22 billion last year.

"Remittances are critical to macroeconomic stability in these countries, and to dollarization in El Salvador," said Vargas. "This is a huge issue in Central America, and it's having a direct hit on their monetary policies."

He added that "all Central American countries will be hard-hit. But even before the crisis, the region was facing problems. China was wiping out the textile sector — a key industry in the region."

Muni Figueres, a former top official at the Inter-American Development Bank, said that "until the current crisis, their economies were growing pretty well, and they were even making palpable improvements in areas which they were terribly deficient, like the busines climate and their judiciary systems. Progress was being made slowly but surely — and all of this progress was predicated on growing economies."

Figueres, Costa Rica's former minister of trade, warned that if the world economy continues to decline at the current pace, remittances will suffer drastically.

"That means lower-middle-class people will no longer have the income they were receiving. And with reduced trade, the middle class that was emerging will also shrink," she said.

"If it's a short-term crisis, then possible there will be enough resources to survive and go on taking advantage of CAFTA," she said. "But if the economy keeps on shrinking, these countries will be left without markets — and economies must grow in order for these societies to have even a vague possibility of moving forward."

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