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Study analyzes challenges faced by Central America as it seeks sustainable development

A new publication uses analysis of trade, investment, migration, the financial sector, raw materials, and natural resources to propose policy options

The Inter-American Development Bank and the Latin American Center for Competitiveness and Sustainable Development (CLACDS) of INCAE Business School have presented in San Jose, Costa Rica, a book entitled “The Future of Central America: Challenges for Sustainable Development”,  which looks at the recent situation in the region in terms of trade policy, investment, the financial sector, migration, raw materials and natural resources and proposes policy options so as to address the challenges posed by these issues.

Over the past five years, Central America, Panama and the Dominican Republic (CAPDR) have outperformed the rest of Latin America and the Caribbean, posting average economic growth of 4.4% between 2014 and 2018 (compared to 0.7% in Latin America and the Caribbean and 3.6% globally). This robust showing is linked to the strength of the US economy, the region's main trading partner, investor and source of remittances.

In addition to this favorable outlook, for more than 10 years now the CAPDR countries have been adopting a strategy of trade openness that has allowed them to boost exports and position themselves in international markets for local products such as coffee, bananas, sugar and textiles. Financial integration has also been encouraged, so banks both inside and outside the region have enhanced their presence and received greater flows of external investment: between 2014 and 2018 foreign direct investment accounted for 4.6% of GDP, due mainly to reinvestment of profits and new investment.

These policies were developed as countries around the world opened their borders to trade, financial flows and in some regions, even people. But in recent years some countries have shifted to more restrictive trade and immigration policies. As these policies take hold, they will have major effects on the CAPDR countries so it is critical that they act to consolidate what they have achieved and provide themselves with the opportunity to accelerate their economic growth and raise living standards for their people as they look to the future.

The recent IDB and INCAE publication aims to serve as an evidence-based framework to assess how the region might address the challenges it confronts. As for trade policy, it looks at what implications possible changes by trading partners might have for the CAPDR countries and suggests trade alternatives and makes recommendations for greater intra-regional integration. The study also re-evaluates the role that foreign direct investment plays in the region (it peaked in 2007, accounting for 6.2 percent of regional GDP), and puts in perspective the best practices for luring such investment and maximizing its impact.

The book also addresses possible changing scenarios in US immigration policy and how they might affect remittance flows, the return of migrants and dissuading emigration from the so-called Northern Triangle. It also looks at the recent process of financial integration and implementation of international regulations in the financial sector, and proposes policies  to strengthen financial stability in the region.

Also analyzed are recent conditions in world markets for raw materials and how the regional economy might be affected by changes in prices for export goods, in addition to imported energy products and their local markets. Finally, this book examines the importance of natural capital for national wealth and human well-being, and explores options for firming up the integration of this capital as the region seeks to develop.

About the IDB
The Inter-American Development Bank is devoted to improving lives. Established in 1959, the IDB is a leading source of long-term financing for economic, social and institutional development in Latin America and the Caribbean. The IDB also conducts cutting-edge research and provides policy advice, technical assistance and training to public and private sector clients throughout the region. Since becoming the first Asian member country of the IDB in 1976, Japan has been involved in IDB projects through a number of funds and programs.

About CLACDS / INCAE
The Latin American Center for Competitiveness and Sustainable Development (CLACDS) is the center of thought and applied research of INCAE Business School. Its mission is to promote sustainable development in the region through research, capacity building and dialogue. CLACDS uses a methodology of four working axes that unites competitiveness, social progress, environmental performance and governance.

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Portada del estudio

More Information

Marta Ruiz-Arranz
Economic Regional Advisor, Country Department Central America, Haiti, Mexico, Panama and Dominican Republic
mruizarranz@iadb.org