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World Bank Document RETURN T RESTRICTED wREPORpoRTS 'THIN DESKlRESTR Report No. WH- 170a ONE WEE Public Disclosure Authorized This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Public Disclosure Authorized ECONOMIC DEVELOPMENT AND PROSPECTS OF CENTRAL AMERICA (in ,ight volumes) Public Disclosure Authorized VOLUME I MAIN REPORT JULne 5, 1967 Public Disclosure Authorized Western Hemisphere Department EQUIVALENTS Currencies = 1 Central American peso (a unit of account) )= 1 Guatemalan quetzal U. S. dollar 1 ) = 2. 5 Salvadorean colones ) = 2. 0 Honduran lempiras = 7. 0 Nicaraguan cordobas = 6. 62 Costa Rican colones Weights and Measures 1 manzana = 1. 727 acres = 0. 69 ha. 1 (60 kilo) coffee bag = 132 pounds 16. 6 coffee bags = 1 metric ton 1 short ton = 2000 pounds 1 quintal = approximately 101 pounds Approximately 20 quintals = 1 short ton (sugar) 1 banana box = 42 pounds 1 banana stem = approximately 1. 35 banana-boxes 1 banana stem = approximately 57 pounds 1 (cotton) bale = 480 lbs. net THE MISSION Hubert F. Havlik Chief of the Mission Jose Antonio Guerra Deputy Chief Pedro-Pablo Kuczynski Chief Economist Hans 0. Schmitt Economist M. P. Benjamin (FAO) Agricultural Economist Hans Platenius Agricultural Economist C. G. Akhurst (FAO) Agricultural Production Advisor Alain 1Varnod (FAO) Commodities Advisor H. S. Caldlwell (FAO) Livestock Advisor Isaac Kissin (FAO) Forestry and Wood-Using Industries Irwin Baskind (OAS) Industrial Advisor Jose Almeida (consultant) Industrial Advisor Edward S. Prentice (consultant), Transportation Economist Eric Schaefer Highway Engineer Francis C. Soges Highway Engineer S. M. L. van der Meer Port Advisor DietrichL. Regling Railway Advisor Joaquin Campillo (UNESCO) Education Advisor George 0. Pierce (consultant) Water Supply and Public Health Advisor Members of Public Utilities Division, under the coordination of Christian Finne, prepared materials on electric power and telecommunications. VOLIUJE I - MAIN REPORT TA.BLE OF CONTENTS Page No. BASIC DATA SUM1MARY AND CONCLUSIONS i - xvi PREFACE PART ONE GENERAL REPORT CHAPTER I RECENT GROWTH EXPERIENCE IN CENTRAL AERICA 1 A. The Region 1 B. Trends in Growth 2 C. The Common Market 4 D. Conclusions 8 II AGRICULTURE 10 A. General Characteristics 10 B. Mqain export products; developments and prospects 11 C. M.inor export products - developments and prospects 15 D. Grains and other foods for domestic consumption 18 E. Colonization and Settlement 20 F. Conclusions 21 III INDUSTRY 23 A. Recent trends and factors in growth 23 B. Prospects for growth 30 C. Investment and financing 37 D. Conclusions 40 IV PUBLIC INVESTMENT 42 A. Public investment in the recent past 42 B. Public investment programs through 1969 and 1970 44 C. Projects of regional significance h7 D. Conclusions 5 TABLE OF CONTENTS 7continued) -2- CHAPTER Page No. V DEVELOPMENT FINANCING AND GROWTH 56 A. Introduction 56 B. Needs for external financing 56 C. Needs for additional domestic financing effort 58 D. The balance of payments and growth prospects 61 PART TIWO - COUNTRY SUvMARIES Guatemala 69 El Salvador 80 Honduras 90 Nicaragua 99 Costa Rica 108 APPENDIX A - The Comnon Mvarket Maps I - IX VOLUME II STATISTICAL APPENDIX TO MAIN REPORT VOLUME III AGRICULTURE VOLUME IV INDUSTRY VOLUME V FORESTRY AND WOOD-USING INDUSTRIES VOLUME VI TRANSPORTATION VOLM4E VII EDUCATION VOLUME VIII WATER SUPPLY, SEWERAGE AND PUBLIC HEALTH CENTRAL Aivi3'RICA: BASIC DATA Guate- 21 Sal- Hon- Nica- Costa Total mala vador duras ragua Rica Region Area, square miles 42,040 3,061 44,480 57,000 19,700 171,280 Population, millions, 1965 4.28 2.95 2.30 1.63 1.46 12.62 annual percent growth rate 17 3.3 .3.6 3.3 3.0 4.1 3.4 Gross Domestic Product, 1965 CA peso millions 1,415 315 514 531 604 3,871 percent ra e of growth. 7.0 7.3 6.3 8.5 7.3 7.1 percapita 320 278 215 325 422 305 Exports, (f.o.b., million CA pesos) 1961 115 L19 74 70 84 462 percent to Central America 9.3 L2.1 11.5 2.6 2.4 8.1 1965 193 L89 127 149 112 770 percent to Central America 20.5 :24.2 17.5 6.8 16.8 17.9 Public Finance, million CA pesos current revenue, 1965 122 90 55 64 72 403 percent of GDP 8.4 Lle0 10.7 12.0 11.8 10.4 public investment, 1965 34 30 13 25 31 133 percent of GDP 2.4 .3.7 2.5 4.7 5.1 3.4 Debt Service Burden total, 1966, million dollars 8.1 3.5 3.1 8.2 21.4 49.3 percent of 1965 exports 4.2 }4.5 2.4 5.5 19.1 6.4 1/ 1960-1965 2/ Estimated SUNNARY AND CONCLUSIONS The Common Yarlcet 1. Since the early 1950's the economies of the five Central American countries have grovn at a rapid rate. Despite a recession due to export difficulties in 1958-1961, overall the GDP growth rate in the last decade has averaged 5-6 percent per annum, well above the 3.3 percent annual increase in population. The major impulse to growth was in exports of traditional commodities - first bananas and coffee, and beginning in the latter 1950's, cotton. The Central American countries are open economies, and variations in exports (which have constituted 18-22 percent of GDP in the last decade) have markedly influenced investment, imports and national output. 2. Hindered by the small domestic markets and low per capita incomes, the countries sought to provide a wider basis for internal economic expansion by elimination of trade restrictions; their efforts over many years resulted in a treaty in 1960 (which came into effect from 1961 to 1963 as the several countries ratified it) whiclh freed trade from tariffs or other restrictions on all but a small portion of the items and volume of trade. A common tariff on these freed items wzas also established, and a machinery for administration of the Common Market arrangements was established, including an Economic Council of MinisterS and a secretariat. A clearing house for payments between the countries wras established, and with a system for settlement of balances with only very small margin of credit. and directions were given to a monetary counci:L to prepare studies aiming at eventual establishment of a monetary union. The Central American Bank for Economic Integration (CABEI) was established and, financed by subscription by the five governments and mainly by 'Loans from several outside agencies (USAID, IDB, and the Mexican Central Bank), began a series of loans for projects of importance of regional integration and development. 3. WIhile an aim of the Common Market policy makers is to raise income as much as possible nationally since all flve countries are still low-income countries, a stated objective of integration is "balanced" economic growth; in practice, thus far, efforts Ln this direction are largely those of favoring the poorest and slowest growing of the countries - Honduras - by permitting special concessions in fiscal incentives for industrial development, giving preference in allocation of regional (CABEI) funds and technical assistance (from regional and international institutions). Thus far, these efforts are reasonable and desirable in terms of the potential significance of Honduras as a market and as a resource base. 4. Following these steps toward trade liberalization, commerce among the five countries soared, more than tripling in value from 1961 to 1965. This expansion contributed over half the increment in the countriest total exports during the period, and, by 1965, 18 percent of the total exports of the five countries took place among them. As a result, the countries have generally increased their interdependence in trade and development. With integration, there have arisen needs for harmonization of ecoromic policies with respect to industry, trade, fiscal, balance of paymients, investment and other fields. 5. Against this background of economic growth, in recent years, the prospects are that recent grovwth rates are unlikely to be maintained in the next few years or so. This is largely because overall prospects for gro,wth in exports of cotton and coffee are far less favorable than in the recent past, so that to 1970 exports of the region as a whole to the outside TwJorld are likely to increase about 2.5 percent annually (remaining stagnant in El Salvador and Guatemala) as compared with the average growth rate of 12.3 percent in 1961-1965. Farther off, from 1970 to 1i75, the prospects are more favorable and regional exports may rise at some 4.5 percent annually UIhile these estimates are subject to a wide margin of error, they imply that the growtlh rate of the Central American region to 1970 would be in the neighborhood of 2.5 percent annually, with Honduras and Nicaragua somewhat above Costa Rica and El Salvador substantially below it. This slackening of growth, together with the repercussions in a variety of fields, sharpens the policy issues for development in each of the countries and for the integratilon movement as a whole. Industry 6. A pressing issue in Central American economic development, from the viewpoint of the integration of the economies and their longer-run development, is the need to revise and improve industrial policies. Industry has been growing rapidly. Value added in manufacture greTwj at an an- nual rate of 11 percent in the region; and, by 1965, it accounted for 13-17 percent of GDP in the several countries. Industry has been the chief beneficiary of the Common M4arket.
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