Discussion surrounding the Central American economy has come to hinge almost entirely on the question of whether the US sinks into recession. Many analysts believe that Central America in the most part will be impacted by every hiccup in the US economy given its high dependency on the US. However, some others think otherwise, believing the impact will be muted.
Continental divide
“For the first time we have a situation in the world economy where world growth is actually protected from a major slowdown by the projected performance of the developing emerging market economies, led by China, but many others also,” said Kemal Davis, head of the United Nations Development Program (UNDP), in a press briefing on January 16. “More than half of the growth next year is expected to come from these economies. Whether this will hold or not remains to be seen ...it’s a question mark.”
And so, on January 21, much of the world viewed the drop in the Asian and South American stock markets as a bad portent, a sign that the emerging giants were flinching or possibly floundering under the specter of a US recession.
Yet in Central America all the attention was not directed East, but North. Central America does very little trade with Asia, and the conventional wisdom holds that the economy here lives and dies by the US alone. Or, if not alone, then without much company.
Guatemalan daily El Periodico asked a number of analysts if a popular maxim on Guatemala’s sensitivity to the US economy - “when the US sneezes, Guatemala catches cold” - still holds. The response, published in a January 23 article, was unanimously “yes.”
Meanwhile at the World Economic Forum (WEF) in Davos, Switzerland, Emilio Lozoya, the head of the WEF’s Latin America section, told EFE that “relative to GDP, Mexico and Central America export significantly to the US, making them more vulnerable to tumults in the US economy. Economies in South America are more diversified and therefore more protected.”
For the most part, prognostications for the Latin American economic situation in 2008 have fixed into a pattern. Facing possible economic doom in the US, Latin America will fare better than in past years, many analysts say, with the qualification that Central America and Mexico may not.
“Latin America is in a far better position than it has been in the past. The good news is that there is good news in Latin America,” said Pamela Cox, the World Bank’s vice-president for Latin America and the Caribbean, on November 27. She clarified, however, that there was an exception: “those countries that have strong trade ties with the US and that receive a large amount of remittances from the U.S.”
Dependence up for debate
Not all analysts, however, are equally convinced that Central America continues to be exclusively dependent on the US. Edgar Balsells, the Guatemalan Congress’ representative on the Monetary Board, is a skeptic.
“There has been no movement in the Guatemalan economy,” he told CAR, “and it is not yet known if there will be.”
A recession in the US, he said, will not necessarily hurt Guatemala and might even help it. Why? As investment possibilities dry up in the US, Guatemalan capitalists will return to Guatemala. This, according to Balsells, is why Guatemala’s GDP grew in 1911, even as the US sunk into recession.
“You have to watch what the Guatemalan capitalists do,” he said.
He added that Guatemala has been importing a great deal of cheap Chinese imports, which helps to counter-act rising fuel and food prices.
A month ago, the World Bank’s second in command and managing director for Latin America and the Caribbean, Juan Jose Daboub, told Salvadoran daily La Prensa Grafica that Central America should not be too worried about a US recession. Daboub, who is from El Salvador, commented that in a globalized world, Latin America, but also Central America and “particularly El Salvador,” are less susceptible than they used to be to the vagaries of the US economy.
“If the US economy decelerates, obviously there will be an impact on our economies,” he said. “Nevertheless, this impact will be significantly less than it would have been ten or fifteen years ago, when the economies were less diversified, with fewer international reserves and with more debt in other currencies.”
He was also sanguine about employment for Salvadorans living in the US. He claimed that “our compatriots are in sectors of the economy that, if the US economy decelerates, can easily move to other sectors. For this reason, the impact won’t be as negative.”
To the South, Nicaraguan sociologist and economist Cirilo Otero told the daily Nuevo Diario that although “Nicaraguan businessmen say that exports and remittances will drop, this shouldn’t be cause for alarm.”
He explained that Nicaragua enjoys a certain “advantage” in that Nicaragua’s economy is not tied to international as much as national trade (EI Nuevo Diario, January 18, 2007).
Others are more confident in Central America’s economic outlook, if only because they do not anticipate a recession in the US. A study released this week by Fitch Rating service, found that Latin American businessmen do not believe there will be a recession. According to the study, they are confident that US growth will be between 1% and 2%.
But most analysts are pessimistic. Miguel Guttierez, an analyst for Central American Business intelligence, told CAR that a US recession is “imminent” and that the isthmus will begin to feel its effects in the second semester of 2008 and into 2009 and 2010.
Hugo Maul told CAR that although Guatemala has made progress in inuring itself from a US economic slide, particularly by increasing its international reserves, a US recession will still be troublesome for Guatemala.
(But, at the least, Gutierrez and Maul said that reported financial losses for North American banks will not affect their Central American subsidiaries, as they are run independently of each other.)
Nicaraguan economist Nestor Avedano told El Nuevo Diario that, contrary to Cirilo Otero’s claims, a fall in exports and remittances will have significantly negative effects on Nicaragua’s economy.
Employment woes
Central American countries have barely diversified their exports since the mid-1990s. It is obvious that the Central American export sector is still highly reliant on the US, but how much a recession reduces US consumer demand remains to be seen.
The evidence is clearer, though, that the era of extravagant remittance growth is coming to an end.
Juan Jose Daboub’s comments on emigrant workers in the US - that they can easily glide from sector to sector - if ever true, were soon belied by the release of the US Bureau of Labor Statistics (BLS) employment report for December 2007. According to the report’s household survey, in December alone the unemployment rate rose 0.3 points to 5%. Meanwhile, the economy lost 13,000 non-governmental jobs, according to the BLS’s payroll report. Over the course of the year, unemployment rose by 0.6 points, and the economy added only 1.3 million jobs, one million less than in 2006.
Explaining the results, Jared Bernstein, an analyst for the Economic Policy Institute (EPI), wrote on EPI’s website that “while the jobless rate remains relatively low, at 5%, an uptick of this magnitude (up 0.3% in one month) has historically been either a symptom or a harbinger of recession.”
He added that “one month of particularly weak jobs data does not necessarily signal a new, negative trend (but) a broad set of indicators throughout (the report) suggest the weakening economy has finally reached the job market.”
If the trend continues, migrants will struggle to find new jobs as their old ones disappear. Construction, the US industry that employs the most Central Americans, is the US industry contracting the fastest, a casualty of the collapsed housing market. The BLS report reveals that all other industries are lagging or shrinking.
The industries that employ Central American and Mexican migrants, according to the International InterAmerican Bank (IDB), are: construction (28% of migrants), domestic services (22%), hospitality services (21%), agriculture and textile manufacturing (10%), and administration and professional services (8%). The unemployed (8%) and students and housewives (3%) make up the rest.
The construction industry lost 49,000 jobs in December, bringing it to 236,000 construction jobs lost since an industry peak in September 2006. In the domestic service sector, the economy added only 10,000 jobs in 2007. Meanwhile, the textile industry lost 46,900 jobs and agriculture lost 1,000.
The service sector did continue to add jobs, albeit at a diminished rate. The hospitality sector added some 352,000 in 2007.
Over all, in 2007 the economy created a slight net job gain – around 100,000 positions – in the industries Central Americans tend to work in. This helps to explain why remittance flows continued to grow in 2007. Only the growth rate of remittances sent to El Salvador fell significantly, from 17% in 2006 to 6.5% in 2007.
This is the first year since 2001 that US employment growth rates have fallen, and it is not yet clear if they will continue to fall. If the trends continue and the US economy does dip into a recession, the BLS report indicates that earnings will likely constrict and the flow of remittances, on which Central American economies have come to rely, will slow and possibly stagnate.
According to the Inter-American Development Bank, remittances represent 12% of Guatemala’s GDP, 17% of both Nicaragua’s and El Salvador’s GDP, and 27% of Honduras’ GDP. Roughly four million Central Americans receive remittances; they use 75% of them for daily consumption. An increasing number of remittances are sent from other Central American countries or Europe, but the vast majority still comes from the US. – Third World Network Features
The above article is reproduced from Central America Report, Vol. XXXV No. 4
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