As Wars Wind Down, Hope For the '90s

CENTRAL AMERICAN ECONOMY

CENTRAL AMERICA'S economies are emerging from a decade of economic, military, and social turmoil. Some economists believe the region will profit from falling trade barriers in what could become a decade of economic recovery. Costa Rica is the economic stalwart of the region. It posted the best growth rates in 1989 (5.5 percent) and 1990 (3.5 percent). Noted for high-grade coffee, Costa Rica has been the most successful nation in Central America at diversifying agricultural exports. In 1989, nontraditional exports (flowers, "luxury" fruits, and vegetables) shot up almost 25 percent.

If this trend continues, the Inter-American Development Bank predicts that, in the next several years, as much as 50 percent of exports will be "nontraditional."

This growth, coupled with export-oriented market reforms, has enabled Costa Rica to renegotiate a burdensome external debt. Under the "Brady plan" (named for US Treasury Secretary Nicholas Brady), international banks agreed last year to reduce debt and debt-service payments. High loan payments siphon off funds that could be used for development. Costa Rica, Venezuela, and Mexico are thus far the only Latin countries to benefit from this aspect of the plan.

Last year was the Salvadoran economy's best since the country's civil war began 11 years ago. Lead by record agricultural production (up almost 10 percent), the economy grew at a remarkable 3.4 percent clip. Inflation hit 24 percent, modest by Latin American standards.

International bank economists say that President Alfredo Cristiani's free-market reforms, begun in July 1989, are starting to pay off. They have been aided by strong coffee harvests, which provide 50 percent of export earnings. United States officials estimate that 1990 war damage to the economy was the lowest since the war began. But foreign and domestic investment remains weak.

Mr. Cristiani predicts the economy could grow this year at a 7 to 10 percent rate if peace talks under way in Mexico City succeed. If not, he forecasts 3 to 5 percent growth.

But Central America economic specialist John Weeks predicts that "peace could really let the lid off" political discontent in El Salvador. "With the reentry of the left in the political system, there could be a mass response - strikes and land takeovers - to the poverty and depredation of the war."

Despite steady growth since 1987, including 2.8 percent last year, Guatemala will mark 1990 as the year of its highest inflation rate (77 percent) in four decades.

President Jorge Serrano El 146>as took office in January 1991, declaring that his predecessor had left the government "bankrupt." Mr. Serrano faces exchange-rate problems that contribute to a persistent balance-of-payments shortfall. Tax revenues have shrunk; the government has fallen into arrears with lenders.

Serrano is embarking on a program to correct the nation's financial problems. The government budget is being cut by 10 percent. About 3,000 government workers have been dismissed. New taxes and stricter collection procedures are being put in place. A 15 percent inflation target has been set for this year.

In an attempt to forestall labor dissent, Serrano is holding talks with union leaders about a "social pact" to mitigate the effects on those hit hardest by the austerity measures.

On the positive side, diversification away from traditional tropical crops continues. Nontraditional exports, such as snow peas, melons, flowers, and sesame seeds, were up 13.8 percent last year. These now account for 22 percent of total exports.

International bank officials say Guatemala's debt is manageable; they hope to initiate talks on clearing up arrears shortly.

Living in one of the poorest nations in the hemisphere, Hondurans will find life this year only marginally easier than 1990, economists say. The country is in the throes of an economic austerity plan designed to return it to the good graces of international banks. When Honduras could not make 1988 debt payments, lenders cut all further aid.

Upon taking office early last year, President Rafael Callejas took dramatic steps to cut government spending, reduce tariffs, devalue the currency, increase government income with new taxes, and raise prices for water, telephone, and electricity.

The economy shrank about 2 percent last year. Thousands of government workers were dismissed. The reduction in government spending coincided with a banana workers' strike and high oil prices due to the Persian Gulf crisis. Bananas and coffee account for 55 percent of Honduran exports.

Mr. Callejas's efforts are not popular in a nation where 7 out of 10 people already live in extreme poverty, according to a recent United Nations study. But he has won the backing of international creditors.

"The stabilization and adjustment measures taken so far have improved the country's long-term balance of payments and growth prospects," says a recent World Bank report. Economists expect Honduras to get about $300 million in development loans this year.

Nicaragua faces the most dire economic situation in the region.

President Violeta Barrios de Chamorro took office in April 1990 after a decade of war and socialist policies that left the country in shambles. Productivity is below 1980 levels. Exports are half of 1980 levels. Inflation topped 13,000 percent last year. Debt levels are the highest in Central America - 27 times annual exports, according to the World Bank.

Ms. Chamorro has faced strong political opposition from the Sandinista National Liberation Front, which controls the trade unions. She has tried to enact free-market reforms and regain the confidence of international lenders.

To deflate the hyperinflation, the old cordoba currency is being phased out. The new "gold cordoba," introduced on par with the US dollar last fall, was devalued last month and now trades at five to the dollar.

To rebuild the war-damaged infrastructure, Nicaragua must first refinance the $260 million in arrears owed to the World Bank and $100 million owed to the Inter-American Development Bank. An agreement is expected in mid-May. Once arrears have cleared, the two institutions have pledged to loan Nicaragua $200 million each over three years.

Panama is still crawling out of the economic hole dug by former dictator Manuel Antonio Noreiga's mismanagement, the 1988 US economic sanctions, and the 1989 US invasion. In those two years, real gross domestic product contracted 17 percent. Economic growth in 1990 was 1 percent.

But with most of the post-invasion $420 million US aid package now available, some economists say 1991 will mark a turning point in Panama's road to recovery.

The service sector - 70 percent of economic output - was hard hit by political instability. Foreign banking deposits fell from $28.9 billion to $3.6 billion. Deposits have since risen to $5 billion.

But further inflows are expected following this month's long-awaited agreement to open Panama bank records to US drug and money laundering investigations. Panama balked at allowing tax evasion investigations under the pact. And the uncertainty kept deposits away, Panamanian officials say. The agreement also releases $84 million in US aid.

International lenders are encouraged by President Guillermo Endara's program to tighten fiscal policy, lower trade barriers, and begin privatization.

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