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Can Central America Ensure its Productive Transformation through Intraregional Trade?

22 November 2016
by Guest author

siecaJavier A Gutiérrez, Executive Director, Secretariat for Central American Economic Integration (SIECA)

Emerging regional economies have proved resilient to the slowdown in both economic growth and international trade seen in recent years. For Central America in particular, the challenge involved sustaining the impact of reduced demand for its products from key partners like the United States and the European Union – in 2015 extra regional trade decreased by 11.2%. Despite this, a growth of 1.5% in intraregional trade in the same period has helped the region maintain healthier levels of growth. In line with UNCTAD’s argument that regional trade is an essential part of developing countries’ inclusive development and poverty reduction, Central America has indeed made strides in developing its industries through increased value-added trade within its members. Taking advantage of specialization and complementarities between the different economies in the isthmus, the region has boosted regional production networks to enhance productivity.

After the United States, Central America is the second market for its own products – 32.7% of its exports remain within the region. And while main export products reaching external markets are commodity-intensive (with top products including coffee, sugar, bananas and plantains, and fruits) agroindustry and industrial products make up 90% of trade within the economies in the region. Industrial products alone make up 65.9% of the total, pointing to the increased value-added of intraregional trade in sectors like medicines; plastic packaging items; food preparations; bakery and pastry products; water, mineral and carbonated; paper containers; insecticides, rat poison and anti-rodents.

As trade within the region is more sophisticated and diverse than trade with external partners, economies in the region could leverage intraregional trade to move away from commodity-based economies. Market forces have indeed supported the development of regional value chains in the Central American market. Examples include Unipharm Group, a pharmaceutical company with presence in all countries in the region and in six other markets in Latin America and the Caribbean. With operations based in Guatemala and Mexico, Unipharm develops, produces and trades over 1,200 pharmaceutical products throughout the region.

Because the development of these chains has been spontaneous, however, most of the opportunities the private sector has focused on remain biased to trade between neighbouring countries. The textile production chain, for instance, developed full-package production capacity in Central America’s northern triangle (Guatemala, Honduras, and El Salvador). And most intraregional trade is carried out between neighboring countries – besides the above, for example, Costa Rica and Panama have more intensive commercial links than do more distant peers (see table).

Central America: Intraregional Exports per Country (2015) Participation rates (%)

Exporting Country Destination of exports
Costa Rica El Salvador Guatemala Honduras Nicaragua Panama Total
Costa Rica 12.9 23.3 15.0 23.7 25.2 100.0
El Salvador 11.3 33.4 33.1 16.3 5.9 100.0
Guatemala 13.1 36.0 27.1 16.5 7.2 100.0
Honduras 10.0 34.6 24.7 22.7 8.0 100.0
Nicaragua 21.2 41.8 17.9 13.6 5.4 100.0
Panama 54.8 9.9 10.1 7.9 17.3 100.0
Total intraregional trade          

Source: Secretariat for Central American Economic Integration (SIECA)

Taking advantage of cross-border coordination and exploiting the benefits of economies of scale is crucial to advance in this line. Policymakers addressing this issue have focused on initiatives to reduce the time and cost of international freight, strengthen cross-border coordination, and implementing trade facilitation measures. This points in the right direction. As shown by the experience of the Association of Southeast Asian Nations (ASEAN), the consolidation of the intraregional market – which makes up 24% of total trade – has been a vital factor for it to become the world’s fastest-developing economic region.

A combination of tariff reform, a strong emphasis on the facilitation of trade flows, and a focus on services have strengthened ASEAN’s participation in global trade. But it has also supported the development of more sophisticated value chains.  Singaporean instant food and beverage firm Super Group has expanded its production to over 300 different items for consumption throughout the region in 3 decades. This example also shows how the diversification and specialization through regional production networks increases and shapes the regional trade. Super developed joint-ventures in the Philippines in 2004, built a production base in Malaysia in 2005-2006 and in China in 2010-2011.

Services, too, have become more relevant in intraregional trade. Indonesian company WIKA expanded its operations and diversified its core business, from electrical supplies and pipe fitting to construction, engineering procurement and investments more broadly[1].

In fact, we often overlook the opportunities available in the region, and some key industries have the potential to help insert Central America in global trade more actively. But as we move forward, policymakers need to focus on raising productivity and nurturing the development of higher value-added production networks. To do this, Ministers of Trade and Economic Integration are already working on a region-wide agenda to facilitate trade[2], boost infrastructure investment[3], and foster the development of regional value chains[4]. And they’re also working in tandem with the private sector to explore hitherto unforeseen opportunities. Adapting policies to accommodate these efforts will prove crucial in years to come, and allow the region to harness a larger market size and boost productive capacity.

Useful links

The OECD and Latin America and the Caribbean

OECD Latin America Economic Outlook 2016: Towards a New Partnership with China

 

[1] ASEAN, 2015. A blue print for growth ASEAN Economic Community 2015: Progress and Key Achievements. Jakarta: ASEAN.

Decán, M. V. P., 2015. Costa Rica, suelo fértil para los startups. Estrategia y Negocios, 7 Septiembre.

ITC, 2012. International Trade Center. Available at: http://www.intracen.org/news/Interregional-and-intraregional-trade-in-emerging-markets-identified-as-key-to-addressing-global-economic-crisis/

Lincoln, E. J., 2004. East Asian Economic Regionalism. New York: Brookings Institution Press.

Matthews, A., 2003. Regional integration and food security in developing countries. Rome: FAO .

Towards Human Resilience: Sustaining MDG Progress in an Age of Economic Uncertainty , New York: UNDP,2011

UNCTAD, 2015. Policy brief: Strengthening the private sector to boost continental trade and integration in Africa, Geneva: United Nations Publication .

 

[2] http://www.sieca.int/PortalData/Documentos/8F62504B-7CC2-45F5-B01A-9503DD002337.pdf

[3] http://www.sieca.int/Noticias/NoticiasMostrar.aspx?SegmentoId=1&NoticiaId=1411

[4] http://www.sieca.int/Documentos/DocumentosMostrar.aspx?SegmentoId=2&DocumentoId=5285

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