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
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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.
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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
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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.
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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.
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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.
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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
V-'
-~
--
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
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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
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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
/
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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.
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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.
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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).
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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
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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.
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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.
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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.).
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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
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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.
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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.
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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
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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).
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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
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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.
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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.
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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).
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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.
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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.
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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.
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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).
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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
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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.
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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.
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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.
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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.
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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.
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