Consultative Group for the Reconstruction and Transformation of Central America

"reconstruction must not be at the expense of transformation"

Central America After Hurricane Mitch
The Challenge of Turning a Disaster into an Opportunity

Central America

A.  General Aspects

From October 21 to 31, 1998, Hurricane Mitch swept through Central America with devastating fury, causing, according to ECLAC, more than 9,000 deaths, equal number of disappearances and 13,000 injured; some 460,000 people were left homeless (seriously affected, housed in shelters) and millions were displaced. Direct and indirect material losses have been estimated at about US$6.0 billion, of which two thirds can be found in the primary sectors of production (agriculture, livestock, forestry and fishery), 20% in the infrastructure of transportation and communication, and almost 13% in housing and other social investments. Mitch is considered to be the most deadly hurricane in the last 200 years in the Atlantic, stronger and more intense than Hurricane Andrew, having caused the most serious material damage in history.

Hurricane Mitch hit Central America at a critical moment in its history, during a period of hope, but at a time of difficult transitions. Since the 1987 Peace Summits, the last decade has seen sustained efforts for peace and democracy, economic reforms and regional integration, which have been in a process of consolidation in the region. Enormous progress had been achieved, thereby creating conditions for sustained development, the strengthening of the civil society and better management of natural resources.

Economic growth in the region continued its recovery which begun in 1997, after an abrupt drop in 1996. As a region, Central America grew satisfactorily in 1998, and would have grown more so had it not been for the losses caused by Hurricane Mitch. In the area of the environment, notable progress had also been made. 1998 was headed towards continuity of this process of economic and social development, macroeconomic adjustments, modernization of the States and of a deepening of the process of regional integration.

Central America is committed to respond to the effects of Hurricane Mitch in ways that would attend to the needs of millions of Central Americans affected by this disaster, which, at the same time, would strengthen the longer term process of economic development and democratization. It is evident that the objective of Central America is not that of rebuilding the same type of society and productive structure so vulnerable to natural phenomena as the present one. As a result, Central America sees the disaster caused by Hurricane Mitch not only as an immediate crisis but also as a challenge. This phenomenon of nature is a call to action to find new schemes of development in a form that would reduce the vulnerability of the society to future natural phenomena, and that would strengthen democracy and the perspectives of future economic development. An attempt to rebuild only what was lost would be a historical mistake that would lead the region into a new cycle of disasters and would perpetuate old and new structural, productive, social and environmental weaknesses.

At the inauguration of the first meeting of the Consultative Group for the Reconstruction and Transformation of Central America, convened to confront the problems caused by the Hurricane, the President of The Inter-American Development Bank, Enrique V. Iglesias, urged the delegates of more than 50 donor governments and multilateral organizations to look beyond the emergency and the financial situation of the Central American countries in order to encourage a reconstruction that would transform the region and overcome its former burden of poverty and inequality. Iglesias said that this task must also sustain the recent and costly advances made by those nations in the area of democracy and peace in addition to setting them back on the path towards stability and economic growth and to strengthen the processes of structural reform and regional integration that had been initiated during this decade. Likewise, he pointed out that the central American nations are facing fundamental challenges that requires the support of the entire international community. "That support is for economic development, it is for social justice, and it is for the consolidation of their democratic life. Let us turn the tragedy of Hurricane Mitch into the springboard for a great virtue, the virtue of demonstrating international solidarity."

Delegations to the meeting held in Washington on December 10-11, 1998, pledged support for about US$6.3 billion to help the countries devastated by Hurricane Mitch. This sum includes funds that had already been approved for emergency and humanitarian assistance, tasks of immediate rehabilitation, programs for reconstruction and transformation in the long term, and debt relief during the next few years. A high proportion of this sum would be allocated to the countries most affected, especially Honduras and Nicaragua. These contributions constitute an important first step in this enormous challenge, which will be reviewed next May 25-28 in Stockholm during the second meeting of the Consultative Group. At that time, donors will be able to review national reconstruction and transformation plans and to confirm the commitments that were made in December.

The Inter-American Development Bank announced that, for its part, it expected to allocate about US$3.0 billion in financing and debt relief for the Central American countries devastated by Hurricane Mitch in order to assist them in rebuilding and transforming their economies during the next few years. Honduras and Nicaragua, the nations hardest hit by Mitch would receive concessional loans from the Bank during that period. The Bank also expects to grant Nicaragua debt relief under the HIPC initiative for highly indebted poor countries, and is also committing itself to offer similar help to Honduras as soon as it qualifies for the HIPC.

Likewise, during the meeting, several important advances made in the area of debt relief were announced. The countries of the Paris club arrived at a consensus on December 9, 1998 to offer an immediate moratorium of three years on payments of bilateral debts to Honduras and a moratorium of two years to Nicaragua. The World Bank announced that the Central American Emergency trust, created to help Honduras, Nicaragua, El Salvador and Guatemala with the multilateral debts service, had received contributions and pledges in the amount of US$100 million, and that more support is expected. Finally, the World Bank and the IMF are evaluating the elegibility of Honduras to the HIPC initiative of debt relief for highly indebted poor countries, as well as the decision point for Nicaragua´s is access to HIPC. The IDB will be an important participant in this reduction effort.

The Bank, in turn, is working with the subregion on diverse initiatives so that reconstruction might result in a true transformation. The Bank held a workshop on environmental lessons learned from Hurricane Mitch at the beginning of March, 1999, in San Salvador. Specialists from the Bank are preparing a plan of action to attend to rural poverty in the country most punished by Mitch. Experts from the Bank are also working with Central American authorities on topics of transparency of management of public funds, with the objective of improving the state systems of contracts and acquisitions.

During the first six months since the cataclysm, the Bank has committed more than US$400 millon in financing to programs in Central America. After having sent missions to Honduras, Nicaragua, Guatemala and El Salvador in order to analyze, the magnitude of the resources damages caused by the hurricane, the Bank collaborated with the Central American governments to redirect from operations already in progress to emergency tasks. These reassignations, contributed to immediate disbursements.

The Bank approved in record time new loans for more than US$338 million to support the reconstruction process, especially in the areas of transportation, public health, education and housing. On the other hand, the Bank assigned US$100 million to a new Fund for Central American Reconstruction, created to receive donations from donnor countries. The Multilateral Investment Fund, administered by the Bank, in turn, created a trust of US$12 million to assist micro-enterprises in Central America that were affected by the consequences of Mitch.

B.  Recent Situation in Cental America

In 1998, the regional GDP grew more or less by the same amount as the preceding year, raising the product per inhabitant by 1.6%. The Central American countries have been progressing since 1997, recovering from the decline begun in 1993, and which had reached its lowest point in 1996 (see graph 1). This better performance is the result of a favorable economic environment for the region, with a process more highly accentuated by subregional integration open to the outside, with an adequate macroeconomic equilibrium and in a relatively peaceful and socially harmonious environment. Towards the end of 1998, the economic indicators were favorable with tendencies somewhat better than the year before, until Hurricane Mitch which exacerbated problems that were already evident as a result of the El Niño phenomenon.The region had been receiving significant foreign revenues from exports as well as from net capital inflows attracted by good macroeconomic conditions that promoted direct investment, and repatriations of capita. This improved the fiscal situation, allowed the maintenance of relative exchange stability, and the reduction of interest rates.

Graph 1

The international economic environment had been favorable to Central America: the United States, its principal trading partner, continues to experience significant economic growth with low inflation, international interest rates have remained as stable as the capital markets, international prices for coffee have risen with respect to preceding years, petroleum prices have been low until recently, to all of which may be added the positive trend of "maquiladora" activity that is growing in the region and the increase in family remitances.

Measures geared towards modernization of the State and to strengthen the financial systems were implemented, supported by efforts to control the financial imbalance in the public sector by maintaining discipline in monetary policy. Without exception, although with the differences of degree, the countries continued to introduce reforms geared to strengthening public revenues and to improve expenditures management.

Progress has also been made in the privatization of the state-owned communications and electric power enterprises , as well as in the concession of services such as railways, mail, ports and airports.

Inflationary pressures have been abating, and some countries have been able to maintain single digit inflation rates, although Hurricane Mitch might modify this. As a result, salary increases in some countries have shown presented real improvements.

Intraregional trade has shown an important recovery since 1997 in which it grew 13% (compared to 7% in 1996). Total intraregional exports and imports decreased between 1970 and 1980, a period of crisis for the process of integration (see graph 2). The propensity to trade intraregionally is still low in Central America, in comparison to the trade in other subregions. In 1997 and 1998, the value of Central American exports within Central America was about US$1.8 billion per year while total exports of the subregion amounts to an annual average of US$9.0 billion, that is about 20%. Related to imports, at an annual average of US$18.0 billion, the proportion is only 10% (see graph 3).

Graph 2

Graph 3: Intraregional Trade (as % of Total Foreign Trade)

The five countries carried out negotiations whithin their common market in 1998 that led to a reduction of the list of exceptions to interregional commerce, which is now limited to coffee, sugar, ethyl alcohol, wheat flour and petroleum derivatives. The other goods that originate in Central America are exempted from tariffs at the intraregional level. At the same time, regional trade norms are being revised in order to comply with the commitments assumed by each Central American country in the recent multilateral trade negotiations in the framework of the World Trade Organization, and a set of norms regarding regulations of origin, dishonest trade practices and safeguarding mechanisms have come into force. The negotiations regarding the Northern Triangle (El Salvador, Guatemala, and Honduras) and Mexico have also progressed. At the Americas Summit in Santiago, Chile, the Central American Common Market (CACM) signed a Framework Agreement with MERCOSUR that will strengthen integration and trade relations. At that meeting, the Central American countries signed a communiqué with Chile to accelerate negotiations on free trade.

C.  Hurricane Mitch and its Consequences

The hurricane season which normally occurs between July and November, had in 1998, characteristics of unusual force, causing desolation, loss of life, and economic, social and environmental damages of enormous magnitude. The concentration of events of great meteorological violence was historic: a dozen tropical cyclones affected densely populated zones in the entire Caribbean basin.

These types of calamities, are not unusual in the region; in 1974, the region experienced great loss of human life and significant economic devastation as a result of Hurricane Fifi. Natural disasters occur cyclically in the region, be they climactic, seismic or volcanic in nature. Hurricane Mitch--the last and most powerful storm of the 1998 season--has been classified as the most serious disaster ever to hit Central America in many years. It was not only the force of the storm that touched down on the coasts of the region, but also its extension, the rain that fell, and the apparently erratic trajectory that it followed for several days.

Hurricane Mitch was formed in the southwestern sector of the Caribbean Sea, 360 kilometers from Kingston, Jamaica, on October 21, 1998. In the beginning, the system moved slowly towards the west, becoming more and more intense until it became a tropical storm. Then, Mitch began to move to the northwest towards the Nicaraguan coast. On October 24, it was classified as a hurricane.

By October 26, Hurricane Mitch had continued to gain intensity and became a category 5 hurricane on the Saffir-Simpson scale, becoming one of the most intense hurricanes in the last 200 years in the Caribbean. The pressure at the center of the hurricane reached a minimum of 904 MB, the fourth lowest pressure recorded in an Atlantic hurricane this century. At its greatest intensity, the winds registered sustained velocities of 288 kms/hour, with wind gusts of up to 340 kms/hour. By then, Hurricane Mitch was north of the Honduran coast.

The hurricane changed trajectory and began to move slowly in a southeasterly direction, crossing through Honduras and arriving in El Salvador. During the fives days from October 26 to the 31, it generated torrential downpours, overflowing rivers and causing huge floods that affected the five Central American countries.

It was the rain and the extreme vulnerability of the population, more than the hurricane winds, that caused the disaster. In Choluteca, Honduras, during those five days, 914 mm (36 inches) of rain were recorded; that is to say, 42 times the expected rain for that period under normal conditions (in 5 days, the amount of rain that fell was equivalent to 212 days of an average year). Similar quantities of rain were registered in Tela and La Ceiba on the northern coast of Honduras.

The extraordinary forces of Nature along with decades of exploitation of natural resources without adequate environmental considerations and the conditions of dire poverty came into combination to cause an unprecedented disaster. The first and most particularly direct effect is the loss of human life. Particularly, poor people, whose conditions of poverty increase their vulnerability. According to ECLAC, a total of 9,214 deaths (of these, 5,657 in Honduras and 3, 045 in Nicaragua), 9, 171 people missing (8,058 alone in Honduras), 13,042 hurt (of these, 12,275 in Honduras), and 3,465,000 affected (1,500,000 Hondurans and 868,000 Nicaraguans) are estimated.

Damages and direct and indirect production looses were also estimated by ECLAC at the equivalent of US$5.9 billion, of which two thirds in the productive sectors (agriculture, forestry and fishery, industry and commerce), 20% to the physical infrastructure (water and sewage systems, energy, transportation and communications), and a bit more than 13% to the social sectors (housing, health and education). The direct damages were more than 51% of the total (about US$3.0 billion) and the indirect ones--principally lost production due to loss of raw materials or future losses due to damages to plantations, as well as lost revenues from industrial plants that closed down or from diminished trade—make the rest of the damages (US$ 2.9 billion).

Honduras was the most affected country, not only in total number of deaths (66.4%) and missing persons (87.9%), but also in material losses (64.1%). In Honduras, total damages are estimated at US$ 3.8 billion, of which US$2.7 billion correspond to the productive sectors, another US$660 million to physical infrastructure, and US$440 million to the social sectors. In addition, the hurricane had a national scope in Honduras, affecting almost the entire population of 6 million inhabitants. The number left homeless has been estimsted at 1.5 million. There were damages in the 18 departments of the country, although the strongest and most constant winds affected principally the north, particularly Cortés and Colón. Choluteca, in the south recorded the greatest number of deaths.

In Honduras, more than 600,000 were either displaced or had to seek shelter. This required extraordinary parallel activities for the distribution of food, drinking water and medical services, which would have been impossible without the opportune and decisive mobility of the government, the Honduran civil society and the international community. The overcrowding in the shelters gave rise to the outbreak of respiratory, intestinal, eye and skin diseases. More than 4 million people were without water for some period of time.

For an important group of the population, especially in Honduras and Nicaragua, the situation became very serious, since their source of subsistence was lost in both rural and urban areas. Small farmers saw their crops devastated, their animals lost, their lands useless; at the same time, in many cities, the waters washed away the businesses of small artisans and businessmen; the water swept away the tools from their workshops and their stands at the market, and there is little hope for them of being able to recoup their losses in the short run. Even in the more formal and modern sector, the risk of losing employment temporarily or permanently due to the closing of businesses has grown.

Exports of Central American basic products will suffer more in 1999 than in 1998, since the hurricane produced significant damage on permanent plantations, thereby affecting their future productive capacity. In the Honduran banana industry, very significant losses were recorded, since almost all of the plantations are located in two of the areas most affected by the floods (belonging to the Tela Rail Road Company and its Chiquita brand and to Standard Fruit). The Guatemalan banana industry was also affected by the flooding of their plantations in Izabal. The Nicaraguan banana industry was less affected because their plantations are smaller and the percentage destroyed by the floods was lower. Coffee, the principal export of Honduras, recorded a loss of new production of 500,000 bags, while 105,000 more were destroyed when the warehouses that stored them were flooded; in Guatemala, 55,00 hectares of coffee plants were affected by the prolonged rains and strong winds in the departments of Guatemala and Alta Verapaz; in El Salvador, the excessive rain caused the loss of 3,700 tons of coffee.

In addition to the losses of life and in the productive system, Hurricane Mitch caused significant damages to the environment, especially through direct primary and secondary impact. The intense winds uprooted, defoliated and distorted vegetation, disturbed the fauna, produced strong ocean swells and tides, caused landslides and massive erosion of ground soil on mountain sides due to the voluminous and sustained rains, and erosion to the beaches, etc. The direct secondary effects were seen in mountain landslides, the formation of open gullies, the result of the hydric saturation of the soil on surfaces that had been stripped of their original vegetation, massive deposits of sediments in river and creek beds, as well as on beaches and reefs, formation of fluvial islands, death of animals after the storm, flooding, avalanches, etc.

Central America     Honduras    Nicaragua    El Salvador    Guatemala     Costa Rica


Nicaragua, May 2000   -   Honduras, February 2000   -   Stockholm, May 1999

Inter-American Development Bank