Envío Digital
Central American University - UCA  
  Number 56 | Febrero 1986


Central America

The Economic Factor

Envío team

Central America is going through an economic crisis of unprecedented dimensions. The real per-capita income has fallen to 1972 levels for Guatemala and Costa Rica, to 1970 levels for Honduras, to 1965 levels for Nicaragua and to 1960 levels for El Salvador. The Central American masses have had eight years of aggravated economic suffering, and there’s is no perspective that their situation will improve in the next eight; rather it will most likely worsen.

There are three hypotheses among grassroots thinking to explain the causes of this crisis: 1) the rich are taking advantage and decapitalizing; 2) the FSLN and FMLN revolutionaries have destroyed the region; and 3) US aggression.

Just as the earthquakes of the 1970s that destroyed Central America served to draw attention away from the cruel reality in which 20% of the region’s poorest population had only 4% of the national income while the richest 20% controlled 55%, the economic crisis between 1979 and 1985 became an earthquake of social awareness.

The causes of the economic crisis

The rhythm of growth between 1950 and 1978, the highest in the history of capitalism, created a mirage that prevented an examination of the roots of the economic crisis. The Central American peoples rose up in a situation of obvious economic growth that had permitted the masses to lift their heads. This indicates the fantasy of the reactionary analysis that everything was alright in the isthmus before the Sandinista revolution and the eruption of the political crisis.

The economic growth, based on what the United Nation’s Economic Commission on Latin America (ECLA) calls “additive development,” meant a juxtaposition of measures that involved no profound changes and led to growth without development, justice or social peace. The economic crisis exploded in the early 1970s when the average growth rates for Central America were more than 5%. The fantasy of growth hid the economic cancer eating away at the system: irresponsibility, to give it a respectable name, by Central America’s dominant classes.

Until 1970, the stability of Central America’s economic growth depended on the management of four macroeconomic areas: balance of payments, aggregate supply and demand, fiscal balance and monetary balance. In the 1950-70 period the Central American economies were without debt, inflation, fiscal deficit or monetary instability. These began in the 1970s in Costa Rica, Nicaragua and Honduras, and by the 1980s they also hit El Salvador and Guatemala. Already in the 197Os, the Central American macroeconomic managers had lost control of the basic mechanism. This was during a decade in which the terms of exchange were still favorable to the small agro-exporters of the region.

Beyond the irresponsibility of maintaining the worst income distribution in the world with the consecutive reduction and narrowing of the internal market, other basic aspects of the irresponsibility should also be highlighted.

One of these is the reduction in private investment. While the investment rate in Latin America ranged between 20% and 25% between 1960 and 1980, it was between 14% and 19% in Central America, according to a recent PREALC study. Private investment, which represented 70% to 80% of total investment in the 1950s, dropped to 50% in all the countries towards 1980. Foreign investors were leaving the region, lowering the 30% of total investment in the industrial sector to 8% by the 1970s, and this decline has continued. The state had to take the role of investor without being able to create the necessary tax reforms, given the opposition of the dominant classes. The tax load in Central America remained around 10% up to the current decade.

On the other hand, the investments made, whether private or state, were “non-reproductive,” in the sense that modernization didn’t carry with it an expansion of the capacity to generate new foreign currency earnings. ECLA itself recognized that this investment had a “limited integration either forward or backward.” Furthermore, investment in the industrial sector played a role against accumulation as it absorbed the greater part of the foreign exchange generated in agroexports in order to produce disposable consumption goods with a high component of imports. At the height of the economic growth, exports, a fundamental source of foreign exchange, only created 17% to 21% of the gross domestic product (GDP) between 1950 and 1980, since a substantial part of the dollars were absorbed in luxury consumption and dependent and artificial foreign industrialization. This investment indiscriminately incorporated modern labor-saving technology. While this implied modernization, it didn’t increase the possibilities of accumulation in the region, and left the people with no means of generating either employment or foreign exchange. In other words, in their irresponsibility the dominant classes ceased investing, and what they did invest they did badly.

Furthermore, they initiated a foreign debt spiral (the region’s debt went from $564 million in 1970 to almost $18 billion in 1985). The fiscal deficit rose more than 1,000% in the 1970s—from $123 million to over $1.3 billion, according to SIECA. This foreign debt and the fiscal deficit served to hide the crisis, artificially maintaining economic movement. Favorable terms of exchange prevented the imbalances from boiling over. The escape valve, however, was the reduction of the poorest sectors’ real salaries between 1970 and 1980. In Guatemala they dropped 41% and in El Salvador some 20%.

The second oil price rise in 1979-80, plus the rapid worsening of the terms of exchange, the international recession and high interest rates imposed by the United States, made the problems initiated and accumulated in the 1970s erupt at an economic level. International stability had been maintained by a stable demand for Central America’s export products and by easy access to international credit sources. Both factors of apparent stability disappeared in the 1980s. The economic crisis of that decade represents a deepening of the imbalances of the 1970s. The maneuvering room disappeared and the crisis spun out of control, adding to the political crisis that had already erupted.

Military logic deepens crisis

Owing to the prolongation of the conflict, economic logic is currently ceding to a military logic that is imposed over the whole region and is deepening the economic crisis even more.

Military budgets are approaching half of all domestic spending in Nicaragua and El Salvador. US militarization in Honduras and the growth in that country’s national army has had a dramatic impact on the Honduran economy. In Guatemala, the growth of militarism and the use of domestic resources to finance war expenditures caused the economic crisis to hit with full force in 1985.

Distortion of the conflict creates
subsidized and geopoliticized economies

The distortion of a North-South conflict into an East-West one has created subsidized and geopoliticized economies in Central America. In the 1970s the US began a subsidy support process that slowly displaced the dominant economic classes in the running of the economy. As Central America’s military conflict deepened, foreign economic forces displaced not only the dominant classes but the states themselves in the running of their economies. In the 1970s, subsidy support worked in the interests of financial capital. In the 80s the justification for the subsidies became fundamentally geopolitical and counterinsurgent, and they were managed handled by the US Agency for International Development and the US Embassy. The exception to this rule was Guatemala, which maintained its own financing capacity until 1984. The refusal of Guatemala’s bourgeoisie to increase its own taxes, however, forced the government deeply into debt, deficit financing and currency devaluation.

It is important to note that the economic crisis hit first in Costa Rica. Monetary imbalances and devaluations occurred there and in Nicaragua in the late 1970s. The liberal reforms established in Costa Rica in 1948 didn’t protect that country from the same foreign and domestic imbalances that hit the rest of the isthmus. The liberal reforms in these small peripheral and underdeveloped countries don’t assure future well-being for the majorities or self-sustained economic growth. The current promises of the Christian Democrats and other centrist candidates are false in two respects: the candidates don’t have the capacity to achieve them and, more profoundly, even achieving them wouldn’t assure the development and well-being of the majorities.

Economic recolonization

The stepped-up tendency to increase external economic dependence today requires subsidized economies with serious political consequences for the self-determination of these peoples. The economic recolonization process and the establishment of informal protectorates is a clear fact in the entire region. In El Salvador the United States paid out $744 million in 1984, which amounts to 82% of the country’s exports, 20% of its GDP and 117% of the Salvadoran government’s current expenses. This means that the US subsidy in El Salvador that year was the equivalent of 58% of the country’s own taxes.

In Costa Rica the subsidy is estimated to be $1.3 billion, and in Honduras in 1984-1985 it was on the order of $500 million, according to the US Embassy. In the case of El Salvador, this status of economic protectorate implies a Vietnamization of the Salvadoran economy and in the case of Honduras and Costa Rica a shameful loss of sovereignty.

The Nicaraguan economy is the most subsidized one in the isthmus. But the qualitative difference is that its sources of subsidy are very diversified: about 48% comes from the countries of Latin America and the third world; and of the raining 52%, half comes from capitalist countries like Sweden, Italy, Spain, Holland, Canada, etc., and the other half from socialist countries. Furthermore, this subsidy has served to finance deep structural changes in its economy. Despite the dependency this implies, Nicaragua shows much more diversification and more independence with regard to the inflow of international aid than the rest of the Central American countries show with regard to US aid.

Economic decline and
abandonment by old dominant classes

The prolongation of the conflict is bringing about the decline of the old historic subject. According to ECLA, “The depth of the crisis has led to a climate of demoralization and uncertainty.” This can be seen in the flight of capital, the reduction of investments, the refusal to pay a war tax, the transfer of economic interests to services and speculation (where there’s a more rapid growth in the profit rate), and above all the transfer of the economic crisis onto the shoulders of the majorities with an increase in their suffering and rebelliousness.

In addition, the growing recolonization leads to fights within the bourgeoisie over portions of US aid. Corruption of all kinds is increasing, ranging from the national banks to the aid programs, and breaking up the economies into “free zones” for the military and the corrupt civilian-military apparatus that is administering the recolonization—a class of newly rich born of corruption and of growth in the new service sectors.

As the crisis deepens, the logic of the old economic minorities disappears. We’ve already seen the birth of a new logic of the more corrupt and less productive minorities—a logic that conflicts more forcefully with the logic of the majorities, of the new historical subject that is struggling for greater economic independence from imperial controls and seeking the satisfaction of basic needs as the foundation of the future economic upturn.

No bourgeois economic project in the isthmus

Due to the uncertainty, disinvestment, capital flight, corruption and artificial consumption, the former dominant classes clash with the economic reactivation project proposed by the United States. In other words, there’s no economic subject to administer the economy of dependent capitalism that the United States is trying to revive in the Central American isthmus. Without a dependent bourgeoisie that would defend its class privileges by means of a medium-range project, the indirect US intervention is running into a crisis. Every year greater subsidies are needed for the Central American economy’s “bottomless barrel.”

There is no truly national bourgeois economic project in the region today. Instead of confronting its own crisis, the Central American bourgeoisie is enjoying the niceties of US life, sending its children to MIT, continuing to send out its capital, enjoying the soft jobs made possible by US subsidy, aid hoping that “the boys” from the US will be willing to die in the volcanoes of Central America to save them from communism. It’s the same problematic that the empire faced in Vietnam. In addition, the conflict between the administration’s proposal for more funds and Congress’ fear of a “bottomless barrel” doesn’t permit the formation of a precise and rapid policy.

Super-urbanization and
gigantic growth of the informal market

The prolongation of the conflict is bringing about a flight from the rural areas, which means a reduction of the national territory and the base for accumulation and an unproductive super-urbanization. In El Salvador, cities like San Miguel and Sonsonate have doubled their population between 1980 and 1985, while the growth of Managua, Guatemala City and San Salvador averages about 7% per year.

This super-urbanization creates a false image of economic movement. The “boom” in highly sophisticated services leads to a situation in which the coffee and cotton-growing bourgeoisie get lost in the hinterland of capital.

Central American integration erodes

Commerce within the region has been drastically reduced. The whole sector that helps bring about the integration of the isthmus depends on imported inputs, which are very scarce now due to the collapse of foreign exchange. Basically, the Central American Common Market, which served as a multiplier and sustainer of growth for two decades, is today, as ECLA recognizes, the transmission mechanism of the backward economic forces and thus makes the economic crisis itself greater.

Crisis falls on shoulders of poorest

ECLA estimated that 64% of the population was living in poverty, 42% of them in extreme poverty, in the 1980s. ECLA also recognizes that this situation has continued to deteriorate since 1980. In El Salvador, taxes on income and inheritance have gone down while indirect taxes have increased. All this has brought about increased labor tensions and an increase in strikes by public employees. In addition, it has increasingly forced people to migrate out of the region, particularly to the United States. (Los Angeles is the second largest Salvadoran city, and New York and Washington compete with Santa Ana for the rank of third largest.)

The Simpson-Mazzoli bill to combat illegal immigration would be superfluous if there were an agrarian and economic reform in Central America that would give these people bread, shelter, work and dignity. Another aspect is that these poor immigrants have been sending back remittances of $125 million to El Salvador, which after coffee constitutes the second largest official source of foreign exchange. It is estimated that family support sent from the United States to El Salvador through official and unofficial channels amounts to $300 million, equal to 39% of El Salvador’s total exports. (Even with illegal salaries, a Salvadoran in Los Angeles can earn in three days what a teacher in El Salvador earns in a month, or there times what a farm worker in El Salvador earns in a month.)

The urban informal sector has become a political battleground. This sector was a key element in the Nicaraguan insurrection and is an important factor in the popular struggles in El Salvador and the September uprisings in Guatemala. The urban informal sector is seen as the most important social force by both the old and new historic subject. In the meeting promoted by Kissinger in San Pedro de Sula it was agreed that “the informal sector must be taken duly into account if the private sector wants to survive”.

The economic tendency we foresee is the loss of any rational economic autonomy, with the regional economy becoming ever more a function of US geopolitics. The recolonialization of the economies and the collapse of the bourgeois economic project will not permit a prolonged -intensity war. Instead, a choice will have to be made between direct military definition and authentic negotiations.

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The Economic Factor

The Military Factor

The Political Factor

The International Factor: Coexistence or prolonged conflict?


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