World Bank study identifies policy priorities for each country and for the region to stimulate sustainable growth and job creation.
WASHINGTON, D.C., April 26, 2021 – The six Central American countries (Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama) can increase the productivity of their economies and workforce and recover from the largest economic recession in their history -caused by the pandemic and exacerbated by hurricanes Eta and Iota- and move towards a strong and sustainable economic growth, according to a new World Bank study.
The report “Unleashing Central America’s Growth Potential” released today, highlights that these countries can boost their economies through a series of reforms in key areas. These include reducing costs and barriers to trade; boosting investment in human capital, innovation, and physical and digital infrastructure; attracting private investment through improving business environment and the quality of institutions, and a greater inclusion of women and young people in the labor market.
The study reviewed the performance of Central America during the last three decades and found that, although between 1991 and 2017 the region’s economy grew 4.5% per year on average -besting the rest of Latin America and the Caribbean-, this economic growth was achieved with little productivity growth.
Due to rapid growth of the working-age population during that period, the increased number of workers accounted for two-thirds of the economic growth achieved. Given that a steep decline in the growth of the working-age population is expected, a further increase in productivity (defined as a greater ability of firms and the workforce to produce more and better goods and services) will be essential to sustain strong growth going forward.
“Now is the moment to rethink the future of Central America and introduce strategic reforms to benefit current and future generations with more economic opportunities and prosperity,” said Michel Kerf, World Bank Director for Central America and the Dominican Republic. “The pandemic has significantly affected economic growth and reduced fiscal space in the region. However, the resumption of global trade and the recovery of the United States and China create opportunities to attract new domestic and foreign investments and increase the volume and value of Central American exports, which can boost sustainable and inclusive growth, with greater creation of good jobs and poverty reduction.”
The pandemic pushed Central America into its greatest economic contraction. However, global trade of goods has recovered, prices of commodities are stable, remittances are higher than a year ago and the regionalization of global value chains towards North America is accelerating, which bodes well for the Central American economies.
Key areas for policy reforms identified in the study include:
- Reducing costs and barriers to intraregional trade and with Mexico: trade costs are high in Central America, with tariff-equivalent trade costs at 74%. Transportation costs are also high, at US$0.17 per ton-kilometer, above those of US$0.06-0.11 in sub-Saharan Africa and US$0.02-0.05 in advanced economies. It is estimated that full implementation of the World Trade Organization’s (WTO) Trade Facilitation Agreement can reduce trade costs by 15.5%, increasing intraregional trade by 61% and the region’s GDP by 4.3% by 2030. Extending these reductions to Mexico would increase trade between Central America and Mexico by 130% and Central America’s GDP by 6.7% by 2030.
- Investing in human capital and in coverage and quality of physical and digital infrastructure: reducing knowledge and skills gaps will strengthen the workforce’s productivity, flexibility, and innovative capacity. It will also allow modern industries intensive in high-skilled workers such as information and communication technology to grow, as well as less skill-intensive industries such as tourism. It is also necessary to boost investment to close gaps in coverage and quality of physical and digital infrastructure, as poor infrastructure hinders economic growth, exacerbates poverty and inequality, and exposes some countries to natural disasters.
- Attracting private investment through improving the business environment and the quality of institutions: large investment projects are needed, but these require clear rules, capable institutions, fiscal availability, and partnerships with the private sector.
- Modernizing labor laws to adapt them to hybrid situations in the post-pandemic era and attract the jobs of the future, facilitating mobility between companies and sectors and labor formalization, and promoting greater participation of women and young people in the labor force are also needed.
The study includes six reports that analyze the growth factors, constraints, and opportunities for each country and a regional report that examines themes common to Central America. They are available at: www.worldbank.org/boostcentralamerica