Reforms Spur Exports, But Little Investment in Bid for Stable Growth

Emerging from a decade of decline, six-nation region sees signs of recovery, but economic outlook is mixed. CENTRAL AMERICAN ECONOMY

IN Central America the 1980s have been dubbed "the lost decade." Civil wars. Soaring debt. Staggering hyper-inflation. Roller coaster oil prices. The combination created a period of unprecedented economic decline. You can see the effect in the glazed eyes of Guatemalan street kids sniffing glue to drive away hunger. It is evident also in the 2 million refugees who abandoned families, homes, and traditions to find safety and work in El Norte ("the North," as the United States has come to be known).

Or you can see it in the statistics.

During eight years of the Reagan administration, the US pumped more military and economic aid on a per capita basis into Central America than to any area in the world except Israel and Egypt. But in this case war and growth did not mix.

Central America slid backward faster than the rest of Latin America, also caught in the debt crisis. The six nations' economic output fell from 4.1 percent of Latin America's total in the 1970s to 3.5 percent by the end of the 1980s. Per capita income in Central America tumbled 17.5 percent on average during the decade.

But there are signs that the region is beginning to emerge from the economic rubble. The '90s may yet be known as an era of recovery, a number of economists and other analysts say.

"I'm a little more sanguine about the '90s," says Marko Voljc, the World Bank's division chief for Central America. "The elements for improvement and greater pragmatism are in place in every country in the region."

Political stability, crucial to gaining foreign investment, is slowly returning, and in a more democratic environment. At the decade's start, Costa Rica was the only country in the region without a military dictatorship. Now, every nation boasts at least the rudiments of a democracy.

Less military spending allows more money for basic needs for the region's population, nearly half of which lives in poverty. With the war in Nicaragua and the cold war in Eastern Europe finished, Central America is no longer a flash point for East-West conflict. Prospects for peace in El Salvador, and to some extent in Guatemala, are growing. Gen. Manuel Antonio Noriega, Panama's ex-ruler, is "retired."

Export-oriented market reforms sweeping through Latin America are under way. Trade barriers are falling. Bloated government bureaucracies are being shrunk; state-owned enterprises privatized; inflation harnessed; currencies devalued to maintain competitive exchange rates.

Nontraditional exports

Most such reforms have been at the insistence of international banking institutions that have begun lending again to Costa Rica, El Salvador, and Honduras.

"We've been encouraged by initial successes - particularly the growth in nontraditional exports," Mr. Voljc says.

Agriculture will remain the mainstay of Central American economies for the foreseeable future. But there is increasing diversification from the traditional tropical exports of coffee, bananas, cotton, sugar and beef. Costa Rica, Guatemala, and more recently El Salvador have succeeded in exporting flowers, "luxury" fruits, and vegetables.

Bank economists are also encouraged by regional trade liberalization trends. Trading among the region's six countries reached $652 million in 1989, up from a low in 1986, but still only half as much as the 1980 level, according to the Inter-American Development Bank. There are new moves to rebuild the Central American "common market" that collapsed in the late '70s and early '80s.

In January, Central American presidents signed an agreement to form a regional free-trade zone by 1996. Mexico, which hopes to negotiate a trade pact with Canada and the US, is boosting the trend by lowering trade barriers to its southern neighbors.

But such optimism has caveats. Countries with similar economic profiles will not benefit much by trading with each other, says Peter Hakim, staff director of the Inter-American Dialogue, a Washington, D.C. policy group.

"They can't just take in each other's wash," Mr. Hakim says. "They need to expand exports to the US, Mexico 201>"

Central America economic expert John Weeks is pessimistic about the region's future. He warns that trade liberalization coupled with Europe's economic integration add up to a growing dependency on US markets.

"The US market for Central American exports has a history of capricious protectionism," says Mr. Weeks, a professor of international politics and economics at Middlebury College.

Twice in the 1980s, when US businesses complained about competition from Central American imports, the US International Trade Commission responded by placing countervailing duties on products from the region. Weeks says Central America may see its European sales shrink. France and Britain are pushing the European Community to give preference to produce from former colonies in Africa and Asia.

The hunt for capital

Nonetheless, at a meeting in Managua, Nicaragua, last month, European Community officials agreed - without setting specific numbers - to give the region's products preferential access.

Another concern in Central America is that the region will not be able to attract capital to rebuild. Eastern Europe, the Soviet Union, and the Middle East need huge sums to redevelop.

Morgan Stanley & Co., the Wall Street investment banking firm, predicts increasing competition for loans among developing countries as well as higher interest rates.

At the same time, the US - the primary aid supplier to the region - is cutting support in the 1990s. US aid jumped in 1990 with a one-time supplemental allocation of $720 million for Nicaragua and Panama. But the trend is to give less.

"United States foreign assistance resource requirements should decline during the 1990s, as increased trade and investment in Central America are expected to generate more foreign exchange from exports of nontraditional products," says the US Agency for International Development's regional strategy for 1991-2000, published in January.

US aid to region slows

USAID officials note that there is an across-the-board budget crunch, saying Central America is not being singled out.

But American University Latin America specialist William LeoGrande argues: "The US helped fuel the conflict which took a huge toll on these economies. Now it has a responsibility to rebuild them." But Mr. LeoGrande acknowledges Washington's attention has shifted. "The cold war is over," he says.

Others, like Hakim of the Inter-American Dialogue, also wonder if US commitment to democracy and development in Central America has been "empty rhetoric." "The United States still has the opportunity to prove its critics wrong," writes Hakim in the Harvard International Review. The US could do this "by sustaining its investment in the region long enough to achieve economic reconstruction."