Envío Digital
Central American University - UCA  
  Number 460 | Octubre 2019


Central America

A global recession + Trump’s anti- immigrant policies = an explosive combo in the region

This Nicaraguan economist discusses some of the economic realities that await the Central American region in the coming years.

Arturo Grigsby

In a recent study by the Inter-American Development Bank( IDB) and the INCAE Business school’s Latin American Center for Competitiveness and Sustainable Development (CLACDS) titled “The Future of Central America: Challenges for Sustainable Development,” a figure appears that shook me: a quarter of a million Central Americans, 250,000 people, could be forced to return to Central America as a result of Donald Trump’s immigration policies. The study warns that our region must prepare itself for this massive return and its consequences.

Studies by both the UN’s Economic Commission for Latin America and the Caribbean (ECLAC)and the International Monetary Fund agree with the IDB-CLACDS study which, using official US government statistics, documents in detail who will be affected by those policies. Worse yet, this situation intertwines with the less favorable economic perspectives for Central America over the next five years.

The last decade has been good

After recovering from the great global recession of 2008, the world economy, particularly the US economy, began to experience a sustained growth that has lasted almost ten years. It was a prolonged cycle not so frequently seen in US economic history.

In Central America, a region that depends so heavily on the US economy, this reactivation cycle created such favorable conditions that it experienced a modest in per-capita income growth during these years that was a little greater and more dynamic in some countries than in others. Guatemala, El Salvador and Honduras grew less than Costa Rica, Panama and Nicaragua, although in Nicaragua’s case, only before the political crisis of April 2018.

This growth was particularly associated with two key factors: an increased foreign direct investment flow and increased remittances sent back home by our emigrants.

Regionally speaking, foreign investment went to textile maquilas (assembly shops for free-trade re-export), export manufacturing, tourism, telecommunications, the financial sector, agro-export and mining. It increased especially in Costa Rica and in Panama; in the latter country above all because of the expansion of the canal.

The remittances grew in a very sustained manner after having dropped 10% during the 2008 global recession, and have not stopped increasing since then. The most accelerated growth was seen in Guatemala and Honduras.

Two Central Americas: The south…

Some differences need to be pointed out between our region’s countries, because discussing the Central American economy from a regional perspective isn’t as simple as it was in the 1970s, or even in the 1980s.

During those years we spoke of the whole Central American economy as an agro-export economy. That common thread went from Guatemala to Costa Rica, stopping short of Panama because the canal always made the Panamanian economy different. During those years, we also talked about societies dominated by large-landowning oligarchies and about the urgent need for agrarian reforms, and about the existence of a relatively small middle class…

Today Central America is much more diverse and heterogeneous than it was years back. Costa Rica and Panama have had significantly different economic trajectories than the rest of Central America for the last three decades. Panama, because first the nationalization and then the expansion of the canal have energized and consolidated its service economy model (logistics, transportation, finances and commerce). In Costa Rica, because even back in the 1980s, when the rest of Central America was experiencing armed conflicts, it began to transform its economic structure in a way that has allowed it to depend much more on its productive capacities than on remittances, a unique case in Central America. That transformation was possible because Costa Rica has been the only Central American country that has privileged education, health and social protection with public investment for decades.

Costa Rica has succeeded in modernizing and diversifying its traditional agro-export sector and establishing a world-famous ecological tourism industry. It also managed to shift its industrial maquilas from being mainly involved in textile assembly to focusing on sophisticated technological manufacturing with the entrance of INTEL, a global manufacturer of microprocessors. The establishment of INTEL in the country at the end of the 1990s has attracted other high-tech companies, including manufacturers of medical devices, biotechnology, pharmaceuticals and electric medical appliances, with an obvious improvement in the workers’ incomes.

…and the north

In contrast, the main structural transformation in the other Central American countries—Guatemala, El Salvador, Honduras and Nicaragua—has been to move from traditional agro-export to the “export” of their populations as a main source of hard currency income. Admittedly, those countries have also had parallel modernization and diversification processes in their economic activities, including an increase in industrial textile maquilas, tourism, nontraditional agricultural products and mining.

El Salvador is the most extreme case in the region of an economy whose main tie to the international market is the export of its labor force. ECLAC data shows that last year’s remittance income from the country’s emigrants exceeded kits total export of goods and services.

Guatemala, Honduras and Nicaragua are also very dependent on remittances, but their export products, be they traditional (coffee, sugar, beef and bananas) or nontraditional (fresh vegetables, shrimp, melons, pineapple…) , tourism and textile maquilas also play an important role in generating foreign currency.

The contrast between the evolution of the economies of northern Central America and those of the south clearly reflect the importance of remittances on the Gross Domestic Product (GDP) of each country. According to a recent study from ECLAC, the value of remittances as a percentage of the GDP in 2018 was 22.2 % in El Salvador, 20.3% in Honduras, 11.8% in Guatemala and 10.3% in Nicaragua, while in Costa Rica and Panama they represented less than 1% of the GDP.

The key role of remittances in the economic growth of both the three Northern Triangle countries and Nicaragua also has significantly increased the vulnerability of their economies to an eventual deterioration of the labor market for their migrants in the United States. In Nicaragua’s case, the dynamics of its current economy and of Costa Rica’s labor market are very important as thousands of Nicaraguan immigrants worked in that neighboring country even before tens of thousands more fled there as political refugees since April 2018, most of them with few resources of their own.

A new gobal recession…

The US economy is emitting clear signs that the growth cycle it experienced after the great global recession is running out. All analyses agree that there will be an economic deceleration, probably even a recession, in the United States. They also agree in that there are symptoms that the US labor market is weakening. What they do not agree on is when the end of the economic growth cycle in the US will become evident. Will it be before the presidential elections of November 2020? Could it even happen before Trump formally launches his reelection campaign? In any case, since the economic growth of the last ten years in Central America has been associated so strongly with the US economy, we know that if the US has a cold, Central America will have pneumonia.

The probable end of the growth cycle in the US and in the global economy will reduce both the foreign direct investment flow and the remittances to Central America. And it will also depress the international prices of the region’s main traditional agro-export products. ECLAC reports that during 2018 international coffee prices fell 13.2%, those of sugar 22% and bananas 2.7%.

…plus Trump’s anti-immigrant policies…

According to US government figures, there are a few more than 3 million Salvadoran, Honduran and Guatemalan immigrants in the US, 60% of them whom do not have a secure and legalized situation, not necessarily due to any fault of their own.

The Trump government has announced several measures that hinder these people’s legalization. One of his first measures was the suspension of the Temporary Protection Status (TPS) benefit, granted to immigrants from ten countries (three of them in Central America) who went to the US seeking protection due to armed conflicts or natural disasters, like the case of Nicaraguan and Honduran victims of hurricane “Mitch” in 1998, or of Salvadorans since 2001 due to the extreme violence in their country. Rough estimates are that 195,000 Salvadorans, 57,000 Hondurans and 3,000 Nicaraguans were benefitted by the TPS program.

Immigrants benefited by the TPS, which was for 18 months, had the right to a work permit, Social Security and round-trip travel outside of the US, and they couldn’t be detained much less deported for immigration reasons. For years, the TPS was extended time and time again until the Trump administration suspended it. At the moment, several successful lawsuits against the suspension of the TPS are working their way through the courts, which has paralyzed its implementation. However, when the issue reaches the Supreme Court, its justices, who have voted in favor of Trump’s decisions on immigration issues, could overturn them.

Another measure Trump has taken is to suspend DACA (Deferred Action for Childhood Arrivals), which has benefitted what are known as “Dreamers” since it was approved by President Obama in 2012. These are immigrants who arrived as children to the US and are studying and thus cannot be deported even if their status has not been legalized.

In 2017, President Trump suspended any new requests from youth for DACA. The almost 60,000 young Central Americans currently benefitting from this program will be exempt from deportation until 2020, when the Supreme Court will decide about the legality of DACA. The other option would be for Congress to act before the Court does by approving a law in favor of DACA that Trump would have to enact.

On top of these anti-immigrant measures we must also mention the increase of migratory controls inside the United States, the reinforcement of the borders and the tightening of labor control policies for immigrants.

…equal an explosive
combination for our region

If we add the consequences of the Trump administration’s immigration policy to the normal foreseeable consequences of an adverse economic context, the combination is explosive for Central America.

The IDB-CLACDS report calculates that suspension of the TPS and DACA would reduce remittances from Central American immigrants 7.6% annually. By comparison, remittances during the global recession of 2008 decreased even more, 10%.

The convergence of the predicted global recession with Trump’s immigration policies present Central America with a challenge to grow more and generate more jobs. In countries like ours, where there’s a historical difficulty creating quality jobs, an avalanche of tens of thousands of returnees would create a crisis hard to solve within the framework of an already adverse economic context.

The capacity of the northern Central American countries to respond to a crisis of that magnitude is also severely limited by their governments’ lack of social legitimacy and by their current political instability, with the possible exception of El Salvador. The Nicaraguan case is even more problematic because its political crisis, which is not being resolved, has placed the country in a severe economic recession with no improvement in sight. Not even Costa Rica will be immune to all this because it won’t grow at the same rate as it has been during this whole decade, and is having to absorb a large and growing number of Nicaraguan emigrants and exiles.

Massive deportations will aggravate social conflicts and deepen the deterioration of people’s living conditions. The perspectives for the global economy are not encouraging. And the perspectives for the Central American economy are even worse. In conclusion, the immediate economic future looks grim for Central America.

Arturo Grigsby is a member of envío’s Editorial Council. This was his presentation to this year’s annual Reflection Seminar organized by the Social Apostolate Commission of the Jesuits in Central America.

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