Can Central America Ensure its Productive Transformation through Intraregional Trade?

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

Regional investment: Time to cooperate

FfD_Logo-140Carole Biau, Investment Division, OECD Directorate for Financial and Enterprise Affairs

One of Aesop’s fables tells of an old man on the point of death, who summoned his sons around him to give them some parting advice. He gave the eldest son a bundle of sticks and asked him to break it. The son was unable to, and his two brothers did no better. The old man then took the bundle apart and gave each of them a stick, which was easily broken.

The moral of this tale – that there is strength in unity – is very straightforward and more or less universal. Similarly, a Kenyan proverb holds that “sticks in a bundle are unbreakable”. However we often seem to lose sight of this basic truth – not only as individuals but also as countries.

Regional economic co-operation has been on the international development agenda for decades. But it requires strong coordination, including in the field of investment policy, and that does not come automatically. On the contrary, countries have often used “beggar-thy-neighbour” policies and seen geographic proximity as a threat rather than an opportunity for investment attraction. Governments have for instance competed to offer investors overly generous tax breaks and incentives, depriving each host country of much needed tax revenues. We have seen similar “races to the bottom” in terms of labour or environmental standards.

Regional collaboration on investment policies can also open up economies of scale. Infrastructure investment in Africa is a case in point: many countries are land-locked and cannot reach ports without cross-border road and rail connections; others are too small to develop cost-effective power or ICT networks; and some potential infrastructure resources (such as lakes and dams) cut across borders and cannot be developed by countries in isolation. In all of these cases, aligning policy frameworks – so that investors face the same ‘rules of the game’ across neighbouring countries – can make a big difference for unlocking investment in cross-border infrastructure projects.

Clearly, whether it is to overcome co-ordination failures or to tap economies of scale in investment policy, regional collaboration – or “bundling of sticks” – is needed. This can help countries move away from a zero-sum game and towards win-win situations.

What are countries doing to strengthen regional co-operation? To take one example: since 2012 the 15 Member States of the Southern African Development Community (SADC) have partnered with the OECD to design the SADC Investment Policy Framework. This framework will be discussed and finalised when SADC Member States come together in Johannesburg on 21-22 July 2015. The framework will help SADC countries to collectively enhance their investment policies, so as to attract investment that can work for the development of the region as a whole. It provides concrete options for: improving coherence and transparency of the investment environment; enhancing market access and healthy competition; reinforcing protection of investors’ rights; and, promoting responsible and inclusive investment.

The Association of Southeast Asian Nations (ASEAN) provides another example of a win-win regional collaboration on investment policy. The ASEAN-OECD Investment Programme allows for experience sharing on investment policy design, implementation and harmonisation across ASEAN Member States. It offers a platform for individual economies to disseminate the results of Investment Policy Reviews undertaken by governments in partnership with the OECD, while benchmarking investment policies and to contributing to identifying good practices. Aesop would be happy with this strengthening of the SADC and ASEAN “bundling of sticks”.

In both regions, these efforts build on the OECD’s main tool to promote investment policy reform and co-ordination: the Policy Framework for Investment (PFI). After having been used by over 25 developing and emerging countries undertaking OECD Investment Policy Reviews since 2006, the PFI has just been updated to ensure its continuing role as a global reference for investment policy reforms and development co-operation. 2015 therefore marks an exciting juncture: the OECD, regional groupings such as SADC and ASEAN, and individual countries, are all embarking on joint work towards implementation of the updated PFI.

Other international organisations, bilateral and multilateral development partners, and the business community, will not be left on the sidelines. In fact when the updated PFI was endorsed in June 2015, they encouraged countries and donors to use the tool as a reference for development co-operation, and particularly as a path towards the new Sustainable Development Goals (SDGs). As the resources needed every year to achieve the SDGs are at least ten times greater than the current levels of aid (ODA), it goes without saying that mobilising private investment flows through instruments such as the PFI will be crucial.

Exactly how different countries and regions can make the most use of the PFI is being discussed this week in Addis Ababa, at the third international conference on Financing for Development. This is a valuable opportunity not only for individual countries to take part, but also for regional groupings such as SADC and ASEAN to share their efforts towards making their bundle of sticks unbreakable and investment for development a “positive sum game”.

Useful links

The Policy Framework for Investment

Southern African Development Community (SADC) Investment Policy Framework

ASEAN-OECD Investment Programme

OECD work on international investment