San José, Costa Rica, since 1956

Global Crisis Threatens C.A. Democracies

WASHINGTON, D.C. – 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 Washington gathering last week entitled “Democracy in Central America: How Strong?”

According to Costa Rica’s Jorge Vargas, a professor at the University of Costa Rica, the outlook is worrisome.

“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.”

Former Costa Rican Ambassador Jaime Daremblum agrees.

“Today, the influence of Venezuelan President Hugo Chávez and his brand of populism, Iranian adventurism, organized crime and drug trafficking, as well as the worldwide economic downturn are endangering democratic gains in Central America,” warned Daremblum, The Hudson Institute’s director of Latin America programs and the event’s moderator.

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

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

But the picture varies widely throughout Central America, home to 41.3 million people and which has a total GDP of $107 billion.

Vargas pointed out that “except for Costa Rica and to some extent El Salvador, the rest of the countries rank among the worst in terms of unequal distribution of income in Latin America, a region already noted for unequal distribution of income.”

He noted that in Guatemala, Honduras, El Salvador and Nicaragua the per-capita GDP is now below that of India.

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

But there is a threat of backslide, he warned.

“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,” he said (see separate story, N2). “The situation is worse in Nicaragua, but El Salvador should be watched closely too.”

He added that “most countries in the region are unable to show substantial progress in establishing the rule of law and accountability over holders of political power. There is rampant corruption and mismanagement of resources.”

John Walters, former director of the White House’s Office of National Drug Control Policy, told participants that Central America’s main problem is that “the basic institutions of justice have been inefficient.”

The former Bush administration drug czar pointed to armed gangs in Mexico and El Salvador, and the dramatic surge in drugrelated violence throughout the region.

Justice systems, he said, are not “accessible to many people in these countries, and they don’t protect individuals even when it’s most needed.”

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

Anne Krueger, former IMF official and now professor of international economics at JohnsHopkinsUniversity, doesn’t have a very reassuring outlook 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,” she said. “The

picture is not a good one.”

“Between 2002 and 2006, the world economy never had it so good,” said Krueger. “Those were 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.”

Experts say 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.

“Remittances are critical to macroeconomic stability in these countries, and to dollarization in El Salvador,” said Vargas.

“This is a huge issue in Central America, and it’s having a direct hit on their monetary policies.”

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

Muni Figueres, a former top official at the Inter-American Development Bank, said that “until the current crisis, their economies were growing pretty well, and they were even making palpable improvements in areas in which they were terribly deficient, like the business climate and their judiciary systems.”

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

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

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


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