The Concentration of Power: More Integration and Inequality

This first of a two-part article argues that Central America has undergone a structural rupture in the last three decades leaving a new economic model based on maquilas and remittances. The region is now undergoing a real and accelerated integration led by big national economic groups and transnational corporations. Its negative tendencies bode ill for democracy and development.

Alexander Segovia

Over the last 30 years the Central American region’s economies and societies have experienced a dramatic change influenced by four factors: armed conflicts in Central America with all of their consequences, the economic reforms implemented in the different countries, globalization and its effects, and profound demographic changes. All of this has altered the accumulation and growth models in our societies and produced a structural rupture with two great consequences. The first is the end of the agroexport economies for the first time in our history and with it the end of political domination by the traditional elites and oligarchies linked to land and agricultural production. The second is the emergence of a new economic model from which new power groups have benefited.

The new growth model, which includes economies that still have a large agricultural sector, such as Nicaragua’s and Guatemala’s, is no longer based on agriculture, but rather on the dynamism of services and commerce. Despite such a drastic change, we still see a Central America that no longer exists, continuing to think of our region as an arena in which the power is concentrated in reactionary agrarian elite and analyzing the reality country by country.

Never before such inequality
or such multifaceted integration

Never have we seen such profound levels of inequality in Central America or such a rapid advance of regional integration. The inequality can be explained by the presence of new and powerful economic groups that increasingly concentrate greater wealth and are the agents pushing for such rapid integration, rather than the states.

There have always been powerful economic groups in Central America. The novelty is that the national market is no longer their only arena of accumulation; they are now globalized into the regional and international markets. Some of these Central American groups are currently investing in 15 or more countries.

Another novelty is the regional integration being fostered by these now regionalized groups, together with the transnational corporations operating in Central America. In the sixties and seventies, regional integration was basically built on trade, particularly of industrial goods, and was implemented by national elites who exported within the Central American region and by transnational companies interested in a national arena of accumulation. It was promoted by official integration institutions with a lot of weight. What is new about the integration taking place today is that it’s being led by the market rather than the states and therefore has little or nothing to do with anything the governments think, say or sign. It’s of no small concern that this integration is being implemented in practice with no regulations.

Today’s integration has a number of different dynamics. The first is the trade dynamic, a factor that has always been there but is no longer the most important. Tourism is generating the second dynamic; it is rapidly integrating the region and, in addition to the big companies, includes the participation of small and medium businesspeople and the Central American population as a whole.

The third, which is one of the most recent and energetic but least known dynamics, is that of the labor markets, our work force; it can be expected to become increasingly dynamic in coming years. Much is known about today’s migration of Nicaraguan workers to Costa Rica, as once was the case with Salvadoran migration to Honduras, but what is not common knowledge is that there’s migration among all the region’s countries. The most recent case involves areas of El Salvador that are filling up with Nicaraguans and Hondurans due to a shortage of Salvadoran labor, which has in turn moved to the United States. This integration is so advanced that certain academics are saying that it no longer makes sense to talk about five labor markets and that we should rather talk about a single, fragmented one.

The fourth dynamic is the one that has the most to do with the change of power in the region. This is the integration involving intra-Central American investment, no longer in agriculture and industry, but rather in businesses not even mentioned 25 to 30 years ago: tourism, electricity services, communications, shopping malls, real estate… The economic groups currently dominating Central America are no longer linked to traditional agriculture, although the agroindustrial and agricultural groups in Guatemala are still very powerful, but to the service economy, real estate and the financial sector.

A novel, complex and exploratory study

What implications does the integration being pushed by the region’s globalized economic groups have for development and democracy? What influence do these groups have on political decisions and the configuration of Central America’s political systems?

To answer these questions we collected, systematized and analyzed quantitative and qualitative information on the new regional economic integration, the Central American economic groups and the transnational companies operating in Central America. We interviewed businesspeople, politicians and academics from the region, seeking to discover what mechanisms they use to influence public policies. Finally, we validated the first version of our study using academics and other people who know about the current situation in Central America.

The subject itself was novel and complex. It wasn’t about obtaining a Central American “who’s who” of the richest and most powerful. The study had a more dynamic approach, looking to discover how they use the power they have. It was also an exploratory study, because there’s a notable lack of quantitative and qualitative information on intra-Central American investments and on the operations performed by the different economic groups. The study’s conclusions and findings thus represent starting points for further studies on the political economy of Central American integration.

The phenomenon of “real integration”

There is fairly widespread agreement in the region’s academic and government circles that economic integration in Central America has strengthened noticeably in the last 15 years. This consensus is backed up by the significant growth of intra-regional commerce, which according to the Secretariat for Central American Economic Integration (SIECA) increased from just over US$671 million in 1990 to nearly $3.44 billion in 2004. Major regional integration is also evident in the increased intra-Central American and international investment made by Central American economic groups operating regionally and by transnational companies with a presence in the area. As a result, growing business integration has been recorded since the early nineties, particularly in activities related to commerce and basic, tourist, professional and financial services. Financial integration, promoted by the main Central American banks, has been accompanied by growing “de facto” dollarization. In 2003, 40% of the financial systems’ total assets in non-dollarized countries (Panama and El Salvador already have the dollar as their currency) were in dollars.

There are other, relatively unstudied manifestations of this new regional integration, such as the growing unification of the labor markets through workers and professionals who have migrated to other countries in the region in search of better work opportunities and salaries. It is also expressed in the territorial integration developed by populations and local authorities in border zones based on their productive specialties and economic characteristics, in which national borders have little or no meaning. The best-known examples are the San Juan River between Costa Rica and Nicaragua; the El Trifinio zone where the borders of El Salvador, Guatemala and Honduras converge; and the Gulf of Fonseca, where El Salvador, Honduras and Nicaragua all have borders.

Real—or business—integration should not be confused with this other broader and more complex kind of integration or with inter-governmental cooperation. The latter refers to all those joint initiatives developed by two or more countries, which can cover practically all spheres of the countries’ economic, social, political and cultural life, such as the fight against contagious diseases, drug trafficking and organized crime, as well as initiatives aimed at reducing the negative impact of natural disasters.

The new economic integration process has occurred outside the framework of regional integration instruments, despite the awakening of interest in institutional integration at the end of the eighties, with new agreements and the renewal of formal integration treaties. What we’ve seen over the past 15 years is that the newer economic integration responds not to government policy or to formal agreements, as happened in the sixties, but to the individual actions of national and foreign businesspeople and to initiatives from the Central American population and certain local governments.

One of the main challenges now facing Central American governments and integration institutions is how to institutionalize the current process of real integration and readjust it so it contributes to the region’s development and democracy.

Outwardly oriented and powered by globalization

The regional economic integration of the nineties is largely the direct result of economic globalization, which in its present phase is characterized, among other things, by the globalizing of free trade; the growing presence on the world stage of transnationals that function as internationally integrated production systems and increasingly concentrate their investments in service-linked activities; the expansion and considerable mobility of capital along with persistent restrictions on labor mobility; and mass access to information in “real time” thanks to the development of information and communication technologies.

Today’s integration is outwardly oriented, and its main objective is to efficiently integrate Central America into the international economy, particularly the US one, through increased trade and investment flows. This makes it substantially different from the integration of four decades ago, whose central objective was to promote the region’s industrialization.

Globalization is one of the factors that has most contributed to the modernization and institutionalization of Central America’s main national economic groups. Faced with greater international competition and the limitation of local markets, these groups gradually started to expand their operations towards the regional and international markets. Their movements coincided with the increased presence of transnational coorporations in the region. Attracted by the processes to liberalize, privatize and deregulate the Central American economies, they increased their investments in the region, buying up state companies and acquiring private ones, mainly from the traditional industrial sector historically owned by family groups. Starting in the early nineties, then, these regional economic groups and transnational companies began to “integrate” Central America, expanding their activities. Their increasing economic power in turn increased their political and social influence.

In the shadow of the Washington Consensus

The second factor, also related to globalization, that has helped strengthen regional economic integration is the application in all the Central American countries of economic reforms based on the Washington Consensus. Although the times, rhythms and scope of the reforms differed in each country, the cornerstone in all cases, as in the rest of Latin America, was trade liberalization, reduced tariff and non-tariff barriers and negotiated trade agreements with countries from outside the region. The reforms also involved the privati-zation of state companies and public service concessions; measures to deregulate economic and market activities, including the labor market; and fiscal and financial reforms.

These reforms had a profound impact on the Central American economies. On the one hand, they moved the region towards a new kind of integration into the international economy, particularly the United States and Mexico, while on the other they helped increase trade and investment flows within the region. The privatization and public service concessions particularly increased intra-Central American and international investment. Meanwhile, the measures to open up and deregulate the economy and those taken by some of the region’s governments—El Salvador, Guatemala and Honduras—to facilitate the transfer of merchandise among countries have led to advances in the elimination of trade barriers, the simplification of customs procedures and the elimination of border posts, which along with relative macroeconomic stability have encouraged intra-regional trade.

The emergence of a new economic model

The third factor that has contributed to greater Central American integration in the past three decades is the region’s structural rupture, which, among other things, brought about the end of the agroexport model based on the dynamism of traditional agricultural exports to markets outside the region. For the first time in our history, the region’s countries are no longer agroexport economies and the region itself is no longer dominated by traditional agrarian elites and oligarchies—at least not as we historically understand them—linked to the land and agricultural production. In the new economic model, based on the dynamism of nontraditional agricultural and industrial (maquila) exports and on activities related to services and commerce, the regional market represents the natural arena of accumulation for the region’s globalized economic groups, and is an arena they know perfectly.

This structural rupture explains the unusual interest displayed by countries of what is known as the Northern Triangle (El Salvador, Guatemala and Honduras) in the integration process during the 1990s. The regional market is important for transnational companies because it represents a platform from which to access the US market. In recent years the regional market has also come to represent an extended internal market with purchasing power worth investing in, thanks to the increase in available income provided by family remittances.

Maquilas and emigrants:
Pillars of the new model

The new Central American economic model is based on three fundamental pillars that differentiate it from both the traditional agroexport model and the one prevailing in the rest of Latin America. The first is the region’s new form of international insertion, which is based on integration with the United States through migration and maquila exports.

In most of the countries the maquilas have become the most important export category and one of the most dynamic activities, despite their notable limitations in terms of productive linkage. As the kind of maquilas prevailing in the region use intensive, unskilled labor, they help generate employment—particularly female—albeit of low quality. Maquila exports also help generate foreign currency and an incipient technology transfer.

Central American migration to the United States has generated a new source of foreign currency in the form of family remittances, which up to now have allowed the external restriction on growth to be transcended and have helped maintain the receiving country’s financial and exchange rate stability. And as remittances represent additional economic surplus, they also help finance investment, reinforce consumption patterns and constitute one of the model’s main redistributive instruments, thus contributing to poverty reduction.

From a different perspective, migration to the United States is one of the new model’s main mechanisms for global adjustment in most of the region’s countries, relieving pressure on the local labor market, which in turn increases maneuvering room for the definition and implementation of public policies, thus contributing to social and political stability. So in the new model, the labor market is mainly adjusted through the exit of workers abroad rather than increased unemployment.

The importance of financial
and exchange rate stability

The new model’s second pillar is financial and exchange rate stability. While this is nothing new, as it was also one of the pillars of the old development model, it does have a different underpinning. Exchange rate stability and low or moderate inflation in the agroexport model were based on the foreign currency generated by primary export goods; now they are based on the new foreign currency sources, particularly nontraditional exports and family remittances.

In addition, financial and exchange rate stability now plays a different role from the one ut played in the agroexport model, where it established a solid base for intra-regional trade and encouraged national and foreign investment in the Central American Common Market. In the new model their fundamental role is to favor national and regional capital accumulation in activities linked to services—particularly financial services—and the maquila industry, as well as attracting foreign investment to the region, both in export activities to the United States and in service and trade sectors operating nationally and regionally.

Financial and exchange rate stability has different functions depending on the modality assumed by the new model in the different countries. In the Salvadoran variant, it is considered a central element to the objectives of turning the country into a regional financial and service market and integrating completely into the US economy.

Productive or speculative model?
Production or consumption?

Those who defend the current model say that the debate between the productive and speculative aspects makes little sense, because in a market economy resources go where the market assigns them, which is by definition the best place for them. They also scoff at any fears over service economies, stating that they are the most developed kind.

Those of us who don’t support the current model agree that true service economies are the most developed kind, but only when they have modern, efficient and competitive productive foundations, which we argue is not the case in Central America, where the model is based on emigrants and their remittances. The consumption capacity of the Central American societies has increased significantly in the last 15 years, which is good, because a society that consumes more is a better one. But is that increased consumption due to more employment? No, it is generated by the remittances sent by relatives abroad.

In the previous agroexport model, the banks were the great financers of the agroexport groups, which were rooted in agricultural production. Today, Central American banks have grown independent of the local sectors and are no longer linked with real production of any kind. Their logic is to make a profit in any sector, preferably the most profitable one. That’s why people studying this evolution predictthat in the next five or ten years 70% of all credits awarded by Central American banks will be for personal consumption rather than for productive companies.

This change in the way of distributing wealth and profits, under the control of the banks, is really dramatic. But there are different nuances in different countries, because the productive structure isn’t the same in Costa Rica, an economy closer to the productive model, as in El Salvador where in 20 years agriculture has come to represent under 10% of the GDP and where 70-80% of all growth is the result of service dynamism, making the Salvadoran banking sector the most important in the region.

From the national to the
regional arena with state support

The new economic model’s third pillar is the regional market. There’s no novelty here, either, because this was also one of the pillars of the former Central American model. It does, however, play a different role in the new model: to generate a solid basis for expanding the accumulation arenas of the main national economic groups and transnational companies operating in the region linked to banks, commerce and services, including basic services such as telecommunications and electricity.

This new conception of the regional market explains the emergence of the real integration being put into practice by the region’s transnationalized business sectors, whose natural area of accumulation is the regional rather than national market. The Central American regional-territorial arena is vitally important for the new model, allowing it to take advantage of economies of scale and productive specialization.

The new model is characterized by its outward orientation, the leading role assigned to businesspeople, the market’s central role in assigning resources and the consequent redefinition of the state’s role, although that role remains central. As in the agroexport model, the state’s participation has been decisive in configuring the new model. Its main function has been to generate and guarantee the basic conditions for installing an market-based economic regime led by the business sector, particularly big business. Among the main mechanisms for this end, the state has privatized the enterprises it once owned, maintained macro-economic stability, reduced taxes, awarded exemptions and exonerations, liberalized domestic prices and generally deregulated the economies.

The hour of the big economic groups
and business-oriented governments

Who have been the main actors in the recent economic integration process? Although it has basically been promoted by the same economic actors that led the Central American Common Market process—i.e. transnational companies and national economic groups—they are developing in a different economic, social and political setting, which makes their actions and interrelations different as well.

The transnationals’ interest in Central America is no longer limited, as in the past, to exploiting the opportunities offered by an expanded—and protected—market. Instead, they now conceive of the region as an important platform from which to export to the United States. In addition, and again unlike in the past, the investments these companies are making in the region have diversified, making them more influential not just because they have more economic power, but also because they control a good part of the basic public services—telecommunications, distribution of electricity—that four decades ago were in state hands.

The economic groups, meanwhile, have undergone a modernization and diversification process that makes their actions different from in the past. First, most of these groups no longer have traditional export agriculture and traditional industry as their main areas of accumulation, as was the case in the sixties and seventies. Their main economic interests now lie in the new dynamic sectors: services; nontraditional exports, including the maquilas; tourism and commerce. And second, the majority of these groups are globalized and see the Central American market as their natural arena of accumulation, as opposed to the past when it was the national market. All of this has increased their influence in the regional sphere, as well as allowing them to establish strategic alliances with the transnational companies to operate jointly in the different countries, albeit in the majority of cases from a subordinated position.

Favored by the peace processes

The fourth factor that has influenced integration is the advent of peace and the democratization processes, which generated a favorable climate of political and social stability. In addition, the pro-business and business-oriented governments that came to power from the beginning of the nineties were significantly influenced by the economic power groups and allowed them to expand regionally, which has favored business integration. This political climate is substantially different from the era of the Central American Common Market, when our countries were governed by authoritarian regimes based on alliances between US-supported military and business figures.

Worrying consequences
for democracy and development

The current regional economic integration process has undoubtedly brought important benefits in terms of investment, employment and improved exploitation of regional productive capacities. It has also helped bring about a new form of international insertion for the region, as well as representing a good opportunity for Central American companies to prepare themselves regionally to compete in the international markets. However, this integration has also unleashed or intensified worrying trends related to democracy and development in the region. Among the most negative are the greater concentration of regional wealth in a few hands and the change in the correlation of political forces in favor of the regional economic groups and transnational companies. All of this has happened in a context of high poverty levels, which decreased in relative terms but increased in absolute terms in the nineties.

The free trade agreement with the United
States will accentuate regional imbalances

Other factors contributing to this imbalance of social, economic and political power in the region include the weakening of the state and the redefinition of its role; the crisis affecting the political parties and their social and political questioning; the weakness of social actors such as the middle classes and the union movement; the absence of modern and pro-active leftwing forces; the coming to power of pro-business and business-oriented governments; and the intellectual and ideological hegemony in the region of the neoliberal tendency, which demands market supremacy over the state and makes businesspeople the main actors in the socioeconomic model.

This imbalance will be further accentuated when the free trade agreement covering the United States, Central America and the Dominican Republic (CAFTA-DR) comes into effect, as it will inevitably help reinforce the concentration of economic and political power in the already influential national and international economic groups operating in the region—at least in the short and medium term. The treaty’s initial conditions clearly favor these groups, which have enough money, information, contacts and influences to exploit the advantages the treaty offers and avoid its potential costs.

The situation is even more worrying if one considers that as a result of the fragility of public finances and the states’ institutional weakness, the Central American governments lack the capacity to design and apply comprehensive development policies or to support those sectors affected by the treaty, particularly the rural poor. This group is the region’s largest sector and depends on agricultural activities, making it most susceptible to the negative impacts of the treaty.

Alexander Segovia is research director for the “Structural Transformation of Central America” Project at El Salvador’s “José Simeón Cañas” Central American University. envío condensed this article from his study “Real Integration and Economic Power Groups in Central America: implications for development and democracy in the region,” financed by the Friedrich Ebert Foundation, together with his talk at the Annual Seminar of the Society of Jesus’ Social Apostolate in Central America, held in San Salvador in September 2006.

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