Opciones De Politica Economica En Centro America

TRADE STRUCTURE, TRADE POLICY AND ECONOMIC POLICY OPTIONS IN CENTRAL AMERICA
Daniel Lederman, Guillermo Perry, Rodrigo Suescún* Office of the Chief Economist Latin America and the Caribbean Region The World Bank November, 2002

I. Introduction Historically there has been a close trading relationship between the US and the Central American (CA) region. In the last years this relationship hasflourished mainly as a result of unilateral efforts on both parts. Since 1983 the US has granted unilateral preferential trade treatment to countries in the region through the Caribbean Basin Initiative (CBI) while Central American countries have achieved significant advances in unilateral trade liberalization through deep trade reforms undertaken during the 1990s. What policy options do thesedevelopments offer to the region? This paper begins by reviewing the main trends in the trade structure of Central American countries over the last two decades, the growing role of the US as the major trading partner, the effect of domestic trade policies as well the effects of NAFTA and recent developments in US agricultural and trade policies (the 2002 Farm Bill). This analysis is aimed atunderstanding a set of trade related issues that should be taken into account in the upcoming trade negotiations with the US and multilaterally under the current round of WTO negotiations -the Doha round- which strives for freer trade, particularly with regard to agricultural trade. The importance of the trade link between the US and Central America naturally leads to assess other policy options, likedeeper forms of integration. The ensuing discussion is organized around the criteria set by the Optimum Currency Area (OCA) literature in order to
*

The authors are grateful to R. Schneider for helpful comments.

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evaluate the likelihood of a successful monetary union. Standard OCA criteria are then supplemented with other arguments relevant for the choice of a monetary regime worthdiscussing in the case of Central America, such as de facto dollarization and the possibility of importing monetary credibility through monetary integration. The paper ends with a discussion of the implications of trade policies and the choice of exchange rate regime for fiscal policies and institutions, as well as the conditions required for successful hard pegs or unilateral dollarization. II. TradeStructure The Central American region is very open to trade, its export base is relatively diversified and trade is carried out with a small number of trading partners, primarily with the US. Although international trade encompasses a higher share of national production than in earlier decades, the region has historically exhibited strong linkages with world commodity markets. Figure 1 shows thattrade openness in the region has exhibited an upward trend since 19601. At this early date our indicator of openness (exports plus imports relative to GDP) took on values slightly lower than 50% for the majority of countries. By the late 1990s the indicator was around 100% for Costa Rica, 70% for Panama, El Salvador (and the Dominican Republic) and 50% for Guatemala. HIPC countries also show a highdegree of openness: 120% for Nicaragua and 100% for Honduras by the end of the sample (lower panel of figure 1). The increase in international trade was caused by deliberate policies implemented during the 90’s in Costa Rica, El Salvador and the HIPCs. Figure 2 depicts an indicator of export diversification -- the Herfindahl index of export-revenues concentration2. There
This may not be true forPanama. Panama’s sample period only starts by the end of the 70s. 2 The Herfindahl index is defined as follows:
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    n  xi  H =∑ n   i =1  ∑ xi   i =1 

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where n is the number of export products and xi is the dollar amount of good i exports. If H = 1, only one export commodity accounts for all export revenue, signaling extremely high concentration. If H tends

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is a...