Inequality, Environmental Neglect And Apathetic Democracy

In Nicaragua, Honduras and El Salvador, democracy goes no further than elections. The way out of underdevelopment is still based on cheap sweatshop labor and cheap natural resources, without considering our environmental advantages. We’re not doing well, and we’re heading down the wrong road.

Welvin Romero Jirón

One of the main objectives of Central America’s political systems is to consolidate the democratic processes begun in the late 1980s and early 1990s. This consolidation is related to establishing and developing a democratic culture and to solving the enormous social and economic problems that are affecting people so severely. Respect for the Constitution and the rule of law, equal access to the justice system, independence and harmony among the branches of state and with the rest of the democratic institutionality, civil participation in decisionmaking and inclusion of the ethnic groups in the nation’s systems are what determine and shape this desired democratic culture.

The political system gets
in the way of democracy

The democratic institutions in Honduras, Nicaragua and El Salvador have failed to reach acceptable development levels following the many years of armed conflicts. The problem isn’t a lack of institutions or of norms to regulate them. While it is in part a lack of capacity to make these institutions function effectively, and often also the citizenry’s ignorance of how they are supposed to work and how to use them, a far more important problem is that the political system falls into the temptation to harness the country’s nascent institutionality for its own political struggle. There’s a remarkable tendency in all three countries for the political system itself to systematically violate the majority of the elements mentioned in the opening paragraph, thus contradicting the development of the kind of civic democratic culture indispensable for the democratic process to take root and evolve.

In Nicaragua, an intense political struggle has triggered a persistent confrontation among the branches of government during the current administration. It has led both the legislative and executive branches to approve laws or issue decrees that clearly violate the Constitution and whose only purpose in most cases has been to serve as political negotiating chips among the parties in conflict. The idea of removing the President has even been flirted with. Nicaragua’s case stands out the most for the persistence and intensity of the confrontation.

In Honduras and El Salvador, violations of the Constitution are associated with anti-gang policies and the treatment of prisoners in the penitentiaries. The severe public safety problems in these two countries, officially linked to gang activity, have brought about plans, sometimes strengthened with laws, that violate the freedom of movement of young people just for sporting tattoos and create an environment in which the security forces easily abuse their power, and mistreat prisoners [see the article on Guatemala in this issue for young people’s descriptions of what they suffer]. A US State Department report in 2005 acknowledges that the Honduran security forces commit extrajudicial murders.

For all that, El Salvador’s National Civil Police gets the third highest ranking in population surveys about the institutions that inspire the most confidence, following only the Catholic Church and the evangelical churches. This appraisal would appear to indicate how fed up people are with gang activity. Meanwhile, the message the authorities send to the public couldn’t be worse: the end justifies the means.

The continuing tense relations among the executive, legislative and judicial branches of government in all three countries make it hard for democratic institutionality to function adequately and undermine their populations’ expectations about a democratic government and political party system. This is moving people closer to the dangerous ground of delegitimizing the system itself.

Paradoxically, the political system, especially the political party system, stops the deepening of the very regime the parties created and claim to promote. This reinforces the perception that the centers of power produced the transition to democracy in these countries as the least costly alternative to the possibility of continuing armed conflicts, not as a natural social development process. Proof of this perception is that there was no consensus in Honduras, Nicaragua or El Salvador about what regime should replace the previous authoritarian scheme. That’s why democracy has gone no further than the electoral aspect.

The violations of the Constitution and the deterioration of relations between the branches of government magnify the negative perception people have of democratic institu-tionality and of the political system, contradict the politicians’ discourse about the deepening of the democratic process, and widen the distance between representatives and represented. There is an important degree of party control over institutionality: the top officials of the different branches of government and other important state institutions answer to their parties rather than to the people and/or to the rule of law. Nor do they respect the principles of efficiency and effectiveness in their posts.

Some progress is noted in Honduras. The 15 Supreme Court justices selected in 2005 came from a list of 45 names submitted by civil society, which was a step towards independence for the judicial branch. The nominations for the Prosecuting Attorney and National Accounting Office that same year, however, were clearly partisan.

Impunity of the powerful

Access to justice is unequal in Honduras, El Salvador and Nicaragua. In Nicaragua, despite efforts to bring the administration of justice to the less-privileged sectors, there is still impunity for high public officials, leaders of the influential parties and those with ties to corporate capital. Because of this, Nicaragua’s President squandered his best efforts in the first three years of government in what he called “the anti-corruption fight,” getting a conviction only for former President Alemán; all others indicted went free and even Alemán is held in house arrest.

In El Salvador, the escape of the key person involved in the Banco de Fomento Agropecuario corruption case with the complicity of the authorities responsible for the sentencing; the Perla case of the Aqueducts and Sewers Administration (ANDA), and the escape of offenders from jails have been emblematic of the impunity of high public officials. And in Honduras, government corruption continues to be cited as one of the problems people resent most, since it is a major factor limiting the state’s efficient functioning.

Without citizen participation

Evidence of the close relationship between democracy and civic participation abounds. Without people’s participation, democracy loses its reason for being, its claim to representation and its legitimacy. It’s thus too bad that governments are so unwilling to permit and encourage civic participation in public policy decisions in more than a few specific topics and only at certain moments. Meanwhile, the economic power groups have expanded their decision-making power and influence and increasingly use direct, informal means—personal contacts—to advocate public policy decisions. Their power and authoritarian methods pose a threat to the weak Central American democracies, and there are no counterweights to their power.

The solutions to age-old problems related to cultural and ethnic heterogeneity are still-pending in the political systems of both Honduras and Nicaragua. There’s never been an interest in reaching an agreement with the ethnic groups being discriminated against that would integrate them into the nation building processes and help resolve the enormous socioeconomic problems in the areas where they live. In Nicaragua’s case, those are the most extensive areas in the country, with strategic natural resources and the highest levels of extreme poverty.

Democracy or electocracy?

Only the mechanism for the turnover of authorities—the electoral process—receives the political system’s respect and decided support. This suggests that democratic government is interpreted as a synonym for elections. This interpretation is in crisis, as shown by two social indicators that reveal intrinsic problems in Central America’s scheme. One is the increased mobilization of the social sectors as expressed in strikes and street protests, and the second is the rising crime rate. These two indicators, which are linked to permanent cycles of crisis and negotiation (very traumatic ones in Nicaragua) and to the persistence of enormously unequal income distribution and high levels of poverty, affect governability.

The political polarization, especially in El Salvador and Nicaragua, seems to point to a struggle between systems. But in practice no alternative proposals are being heard, not even options for administering the democratic system and its current trends. All this is a threat to the sustainability of democracy and makes it impossible to fulfill essential functions: representing citizens, guaranteeing their civil liberties and creating favorable economic conditions. The agreement on political reform reached by the parties in Honduras stands out, in part because it includes a process for consulting parts of the organized social sectors.

Sweatshops: A shaky bet

The gross domestic product (GDP) of Honduras, Nicaragua and El Salvador continued to grow in 2005, although the pace wasn’t the same in each country. At the same time, the economic growth in Nicaragua and Honduras slowed down with respect to 2004 while it accelerated notably in El Salvador.

The Central American Bank for Economic Investment expects the region’s economy as a whole to grow 3.5% annually for a series of reasons. It continues to be supported first by the favorable behavior of foreign trade—both demand and prices; second, by the huge and growing role of family remittances; third, by a favorable net transfer of resources (largely foreign cooperation); and fourth by private investment.

The slowed growth rate in Nicaragua and Honduras is explained by competition from China in textiles and clothing, the lasting consequences of Hurricane Mitch in Honduras and the increase in oil prices, which has generated a notable energy crisis in both countries.

All three countries’ foreign trade has continued to grow, although imports (13.5%) have climbed faster than exports (10.5%), due at least in part to the rising oil bill. The trade balance of the three countries dropped 17.9% between 2004 and 2005. Nicaragua had the greatest reduction (25.5%), followed by Honduras ( 22.3%) and El Salvador (12%). Meanwhile, the current account deficit as a percentage of the GDP remained constant in El Salvador at 3.9%, and dropped by 0.5% in Honduras and by 1.2% in Nicaragua.

There is still a notable tendency for exports to concentrate on a small number of primary products, which is one of the main weaknesses of economic growth in these countries. Export diversification since the 1990s has concentrated principally in products assembled in the offshore sweatshops known as maquilas. The shakiness of this bet, given the maquilas’ weak or nonexistent linkage to the rest of the economy and their dependence on a workforce with low skills and productivity, is well known. Despite the growth of these and other manufacturing plants, the participation of primary products is still key for all three economies, largely because of the low value added to those other products.

Stuck without a road to development

The governments and some business sectors, especially those that have not yet regionalized, are now gambling heavily on the opportunities opening up with the Central American Free Trade Agreement (CAFTA) with the United States. That gamble doesn’t appear to be reflected in the perspectives of a segment of Central America’s economic power groups, particularly the modernizing groups of Salvadoran origin, which are more interested in stability and especially in maintaining or increasing capital flows from the United States back to the region in the form of family remittances.

Some doubt that CAFTA will have a net positive effect on the Central American economies. The majority of analyses, including those by its staunchest supporters, agree that the rural world will be negatively affected. The advantages are concentrated in CAFTA’s effects on manufacturing exports and on cheaper imported consumption goods. The analysts don’t agree on the capacity to compete successfully with China and—linked to the threat from China—whether the investment levels achieved will exceed the agreement’s negative effects.

In this growth model, which does not foster the emergence of highly productive sectors, high quality environmental products and public policies focused on their growth (Costa Rica being the exception), the conditions that have kept the region underdeveloped will continue to be reproduced. It is an empirical fact that dependence on primary exports limits economic development. There is also a strong tendency for small economies dependent on cheap labor and natural resources to experience a growth rollback—precisely the phenomenon that gives rise to the term underdeveloped countries as distinct from the concept of developing ones.

The current trade opening is destroying existing productive chains in these three countries that date back to the import substitution model. And it is not replacing them with anything else, as the new export sectors, particularly the maquilas, have developed without plugging into the rest of the national productive activity in any way. This not only slows the overall GDP growth but also means that the export growth has a more limited effect on the GDP. Put another way, higher export growth rates are needed to achieve the same rate of GDP growth. This dynamic also increases the need for imported inputs and other goods, which exerts even greater pressure on the balance of payments.

International cooperation, foreign investment and especially family remittances are compensating for the current account deficits. Together with the fiscal and financial discipline assumed by the governments, these factors have allowed macroeconomic stability to be maintained. In Nicaragua and El Salvador, fiscal reforms have been passed to improve national tax collection. All these factors have kept the inflation levels from being even higher, particularly given the international oil price increase and its consequences for the electricity generating system in Nicaragua and Honduras.

The powerful and much-needed remittances

Family remittances have increased in importance in the Central American economies. A study done in El Salvador shows that the income of Salvadoran emigrants in the United States is equal to 127% of their home country’s entire GDP and concludes that international migration is one of the dimensions of structural change in El Salvador and a fundamental strategy through which Salvadoran families to ensure their livelihoods.

Family remittances are equal to an important proportion of total exports, maquilas included. They represent 75% of exports in El Salvador, 58% in Nicaragua and 35% in Honduras. In all three countries they have overtaken net resource transfers and net foreign investments and continue to outpace them. In the three countries combined, they added up to US$4.4 billion in 2004, while direct foreign investment in 2005 was only US$877 million and net resource transfers were just under US$1.44 billion.

The remittances are sustaining an economic trend based increasingly on urban economic activity, very neatly in the Salvadoran case, and are becoming a new source of regional capital accumulation, in turn causing an important segment of the economic power groups to focus their efforts on attracting them. The Nicaraguan case illustrates the combined effect of remittances and net resource transfers, in which the sum of the two elements is 31% of the GDP.

While remittances are an important source of income to the households that receive them, and contribute significantly in reducing poverty and indigence, their impact on the poverty rates of all households in each country is relatively small. The sustained increase of remittances will likely redefine some patterns of economic behavior, such as a shift in the relation of urban-rural activities in favor of urban, with the Salvadoran case being the clearest example, and the orientation of more modern power groups, which tend to concentrate on the demands of emigration, such as international transport, telecommunications, financial services, commerce...

A dramatic inequality

The enormously unequal income distribution in the regional economies and the high unemployment and poverty indices are among the most important limits to development and pending public policy issues.

The profound inequality is an obstacle not just to poverty reduction but also to economic growth because it has negative effects on the size of the markets, on industries depending heavily on economies of scale, on aggregate demand with respect to the use of production capacity and on investment. Inequality also affects the capacity of families to invest in educating their children and is associated with an increased fertility rate and with population growth. It generates political instability and social conflicts associated with redistribution pressures, undermines public policy consensus and hinders the management of external disturbances given the disagreement on distributing the burden of the adjustments.

Economic reforms that don’t reduce inequality or improve the social indicators produce discontent in the population and become unsustainable. Because of that, the reforms can’t be evaluated solely on their effect on growth, without taking into account their effects on equity and social conditions.

The Gini Coefficient establishes the extent to which income distribution between people or households in a country deviates from a perfectly equal distribution scenario. The Lorenz Curve indicates the points corresponding to the cumulative percentages of the total income received, with respect to the cumulative percentage of receivers, starting from the poorest person or household. The Gini Coefficient measures the area between the Lorenz Curve and a hypothetical line of absolute equality, expressed as a percentage of the maximum area understood under that line. Therefore, a Gini Coefficient equal to zero means absolute equality, and a coefficient of 100 means maximum inequality.

As can be seen in the table, the Gini Coefficient for the Central American countries reveals a notable inequality in income distribution or consumption. Notwithstanding the differences between the United Nations Development Program and World Bank figures and those of the UN’s Economic Commission on Latin America and the Caribbean (ECLAC), the three institutions agree on the level of socioeconomic inequality in the region, without suggesting efforts to encourage redistributive public policies that would change this indicator in any relevant way. Only the family remittances are alleviating the effects of the current distribution situation.

The state’s role as an active agent in eliminating inequality is one of the areas in the region in which much work remains to be done. This role has been gradually disappearing, with the state abandoning essential tasks for improving the population’s well-being and ensuring equal opportunities for all citizens. Among these tasks, the most basic are education and health care, as well as protecting the populations that live in the most evidently unequal conditions: indigenous peoples and the disabled.

Stunted social policies

Although the countries have made some efforts to improve their social policies, they fall far short of resolving the severe problems people face. It is estimated that in El Salvador some 223,000 children—11.5% of the population between 5 and 17 years of age—are workers. Child labor is most frequent in rural areas. With fourth grade the national educational average in Honduras, enrollment in secondary and university education remains very low, above all in the rural sector, where just 9% of children who enroll in primary school continue their studies.

In Nicaragua, although school enrollment in all three levels—preschool, primary and secondary—has increased, over 831,000 students from 3 to 18 years of age—almost 36% of this total age group—are outside of the educational system. Only 41% of the students who enroll in first grade finish the six years of primary school. By the end of 2005, there were already estimates of a million children not attending school. Furthermore, while infant mortality has dropped considerably and the prevalence of infant malnutrition has fallen systematically over the last decade, nearly one in five minors still lives with chronic malnutrition.

According to the UNDP’s Human Development Index for 2005, the probability at birth of not surviving until 40 years of age—considered a good indicator of a country’s investment in human capital—is 2.6 times higher in Nicaragua and El Salvador than in Costa Rica, and 4.2 times higher in Guatemala and Honduras. It is an eye-opening indicator of the enormous number of people left behind.

Continuing the comparison with Costa Rica, the high water mark for Central America, illiteracy in people 15 and older is 4.8 times higher in Honduras and El Salvador, 5.5 times higher in Nicaragua and 7.3 times higher in Guatemala. Per-capita public health spending is 4.7 times higher in Costa Rica than in Honduras, around 3.6 times higher than in Nicaragua and Guatemala and twice as high as El Salvador. Educational spending in Costa Rica is 1.9 times higher than in Nicaragua and 2.9 times higher than in El Salvador.

Another of the great failings is in the obligatory financing of the social security system. The majority of countries in the region have no stable social security system. Worker protection and the pension system lack norms and programs that offer security and attention to risks in the workplace.

All these indicators become even more dramatic in a world market where competition is based on knowledge, high productivity and natural resource sustainability.

Negative environmental trends

Three trends can be identified with respect to the environmental sustainability of the region’s economic growth. First, the massive extraction of natural resources is continuing. Second, nature-friendly exploitation practices and the production of high quality environmental services and products with value added are only slowly being introduced and in a dispersed and improvised manner, even though the demand patterns in the region’s member countries promote the protection of nature. Third, very little progress has been made in creating an environmentally sustainable business climate.

Central America has three potential competitive advantages: its privileged geographic location, an abundance of natural resources and rich ecological diversity, and year-round agricultural and forestry potential. Of these, only the first isn’t based on sustainable and healthy natural resources. Hence the importance of targeting environmental sustaina-bility in the economic growth policies and fiscal and promotion incentives. A profound change is required in the prevailing extractive exploitation patterns if we are to preserve what still exists and turn around the accumulated deterioration.

Improving the environmental quality of the business climate requires the application of strict, transparent, stable and fair environmental rules that reflect the environmental standards for products and procedures now being adopted by Central America’s trade partners. It also means attracting and promoting businesses that provide high quality environmental services to support industries (treatment of waste and solutions at crisis points of environmental damage), improving the financial system’s environmental commitment and performance, and improving the environmental underpinnings of agribusiness and tourism.

Failing to do all this will limit the access of Central American exports to higher-priced market niches, and will turn what are now environmental deficiencies into insurmountable barriers to duty-free trade. On the other hand, doing all this will send important messages to international investors that Central America is serious about becoming a legitimately competitive region.

We’re not doing well and
we’re not on the right road

Economic growth sustained by cheap, low-skilled labor and cheap, abundant natural resources has nothing to do with Central America’s opportunities and competitive advantages today and in the future. It also has nothing to do with the needs of the Central American people. It’s worth noting tourism’s place in the official discourse on the region’s future, while so little is being done to reach a social agreement that includes the majority of the populations in the development process, at the very least to help reduce social mobilization and crime statistics. So little is being invested in people, who are the faces the tourists will see and who will serve them. It’s even more notable that so little is done to preserve the environment, which is what most tourists will come to enjoy.

The characteristics of the political system and the forms the political struggle has taken contribute very little to our ability to take advantage of the opportunities our main trading partners offer us. The copious flow of hard currency in the form of remittances and international cooperation reduces our capacity to attract high-quality foreign investment, as do the effects of poverty, unemployment and inequality, which are seen in the crime rates and repeated social mobilization of the excluded majorities. Investors take all these signs into account.

Nicaragua has acquired multilateral, regional and bilateral commitments, often unilaterally giving away market access, promising “national treatment” to investments and investors, deregulating the movement of capital, compensating in cases of expropriation, giving full guarantees to foreign direct investment, and offering important tax incentives to investors in certain sectors. Despite all this, investors are not breaking down our doors and the few that have come haven’t offered the quality that the new accumulation patterns demand.

The reduction and eradication of poverty and indigence, better income distribution and social spending that really invests in human capital are key for investors. The idea that a country can find a way out of underdevelopment through cheap labor and cheap, low quality natural resources with little added value is no longer sustainable. Accumulation processes occur through knowledge and its technological applications. This depends on development, and that in turn requires investment in human capital, in highly productive and complex manufacturing processes with value added based on informed, friendly uses of the environment and sustainable and complex environmental services and products. In conclusion, we’re still not on the right road. We aren’t doing well and we’re not heading in the right direction.

Welvin Romero Jirón is a Nitlapán-UCA researcher. This article is extracted from the conclusions to his analysis of the situation in El Salvador, Honduras and Nicaragua and the implications for international cooperation, developed for the Swiss Agency for Cooperation and Development (COSUDE).

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