San José, Costa Rica, since 1956

Falling Remittances Could Slow C.A.’s Recovery

GUATEMALA CITY, Guatemala – Despite some positive pronouncements that green shoots have begun to sprout amid the wilt of last year’s economic recession, Central America is likely to lag behind the rest of Latin America in recovering from the worst global economic crisis since the Great Depression, a United Nations social development expert said.

That’s because Central American economies are tied more tightly to moneys sent home from family members working in the United States, where unemployment is still hovering at around 10 percent. Analysts have yet to fully gauge the impact that the U.S.’ unemployment rate will have on the economies of Central American nations, but the early prognosis is not good, said Martín Hopenhayn, social development director of the U.N.’s Economic Commission for Latin America and the Caribbean (ECLAC).

That factor could dampen other predictions that Central America’s economic recovery will arrive faster than previously expected.

In its 2009 Preliminary Overview of the Economies of Latin America and the Caribbean, released last month, ECLAC forecast 4.1 percent growth overall in 2010 – 4.7 percent in South America and 3 percent in Central America. In 2009, the economies of Latin America and the Caribbean contracted by an estimated 1.8 percent after six years of uninterrupted growth.

ECLAC predicts the economies of Honduras, El Salvador and Nicaragua shrunk by 3 percent, 2.5 percent and 1.5 percent respectively. Unemployment in the region reached 8.3 percent last year.

Despite early hopes that 2010 could be a recovery year for the region, Hopenhayn said the dent in remittances will hurt much of Central America.

“If you have countries like El Salvador, Nicaragua or Honduras, where 17 or 18 percent of the gross domestic product is composed of remittances, most of them coming from migrant workers in the United States … that’s a crucial and critical point,” Hopenhayn said.

Analysts from the World Bank say remittances sent back to Latin America in 2009 could have fallen by more than previously expected – perhaps by as much as 9.6 percent (fourth quarter numbers for 2009 are still being tabulated). A weak recovery in remittances is predicted for 2010.

The decrease in remittance flow to the region is being blamed primarily on the slumping U.S. construction sector, which employs a large number of Latino migrant workers (TT, July 17, 2009).

The impact on Central American economies could be felt even more deeply as remittances become an increasingly vital source of household finances in developing and underdeveloped countries, according to a World Bank report released last November.

In El Salvador, where remittances are 17 percent of the GDP, families are already feeling the pinch. In 2009 the country experienced a near 10 percent drop in remittances, down from $3.8 billion in 2008.

Guatemala’s remittances also fell by nearly 9 percent last year, from $4.4 billion in 2008 to around $4 billion in ‘09.

Less affected were the economies of Nicaragua and Costa Rica, according to the World Bank’s preliminary report. Remittances to Nicaragua fell by about 4 percent, from $818 million in 2008 to $784 million last year, and Costa Rica’s remittances dipped even less.

Remittances, however, are a much more important factor in Nicaragua’s economy, accounting for about 12 percent of the GDP, compared to Costa Rica, where money sent home from abroad represents only 2.4 percent of the economy.

A Taxing Situation

Many of the world’s governments are strapped for cash as the global recession drags into 2010. As a result, Hopenhayn predicts foreign aid for Central America could become increasingly scarce as belt-tightening measures are implemented among the world’s leading donors.

Political problems in countries such as Nicaragua and Honduras, which both saw substantial foreign aid cuts last year due to serious concerns about governance, have not helped the region’s cause as European countries are already focusing more aid towards African nations.

Hopenhayn recommends that Central America should try to become less dependent on foreign aid and concentrate more on increasing revenue by overhauling their tax systems.

“One thing (Central American governments) should do is to expand the tax burden,” he explained. “If you have a tax burden of 9, 10 or 11 percent of the aggregated national income, it’s hard to think that governments with economies of low productivity will have the financial capacity to counterbalance the negative impacts of the crisis.”

He noted that Latin America as a whole places an unfair burden on the poor through indirect taxes.

“Indirect taxes are the taxes on everything you buy: you buy bread you pay a tax, you buy a car you pay a tax. For a piece of bread, a poor person pays a higher percentage of his income than a rich person.

Therefore, indirect taxes are regressive in terms of social justice,” he said.

An important challenge for the years to come will be to modify the region’s tax structure, he said, calling for a greater, more proportional contribution from wages and enterprises.

The Nicaraguan government attempted such a tax reform at the end of 2009. But tax  experts are calling the Sandinistas’ reform effort a “regressive measure” that will do more bad than good to the nation’s struggling economy (NT, Dec. 18, 2009).

Meanwhile, doubt continues to loom around the perceived signs of economic recovery in 2010.

Some analysts argue recovery has already begun, while others think the recession will continue for at least another year.

For Central America, the challenges are plentiful as the region enters this bold new decade, which a writer in a recent issue of The Economist magazine dubbed the “Tenacious Tens.” What remains to be seen is how successfully the predicted economic growth will trickle down to feed the families in need.

But with poverty on the rise, many families will need more than just a trickle.

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