Fragile Central American Democracies Threatened

Special to the Diplomatic Pouch by Larry Luxner Central America’s seven already-fragile democracies 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...

Special to the Diplomatic Pouch contributed by Larry Luxner

Central America’s seven democracies — 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 Feb. 19 gathering titled “Democracy in Central America: How Strong?”

The event, organized by the right-leaning Hudson Institute, attracted 130 people and brought together 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.

The picture varies widely throughout Central America, which covers 324,000 square miles, comprises 41.3 million people and has a total gross domestic product 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,” he said, noting that in four countries — Guatemala, Honduras, El Salvador and Nicaragua — per-capita GDP is now below that of India.

“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,” Vargas continued. “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, according to 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.”

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 slightly better for Costa Rica ($29.90) and El Salvador ($23.70). While 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,” Vargas 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 added, 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 percent, 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.”

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