President George W. Bush shakes hands with legislators and administration officials after signing the Central American Free Trade Agreement (CAFTA) Implementation Act on August 2, 2005. (Credit: The White House; OpenStax included image)

Overview

Central America is one of the most economically impoverished subregions of Latin America and the world. This has had many implications for the United States, considering the close geographic proximity. These implications are mostly focused on trade and the huge influx of migrants who, in most cases, are forced to leave their country due to economic and/or political reasons. Given that the economies of most Central American nations are smaller than average for the region of Latin America, the share of exports in comparison to the average Latin American economy is higher. Total exports in Latin America have comprised 20 to 25 percent of total output since the turn of the millennium. This percentage has been more critical in the cases of Costa Rica (47 percent), Honduras (60 percent), and Panama (79 percent), highlighting one significant distinction with other economies in the area: small economies in Central America are more open and consequently more susceptible to trade shocks. Over the past ten years, the US has maintained its leadership position as the primary importer of goods from Central America. The US continues to be a significant export market in absolute terms, accounting for between 30 and 60 percent of the total exports of the majority of the countries mentioned above. As a result, the US’s economic assistance to Central America is shaped by the region’s growing migration and the economic interest in importing low-cost primary goods.

 

President Xi Jinping (L) holds talks with his Panamanian counterpart Juan Carlos Varela in Panama City, Panama, on Dec 3, 2018. [Photo/Xinhua]

China Effect

Central American countries have not benefited from the booming Chinese demand for primary products. Contrary to South America’s rapidly expanding commodity exporters, Central American nations ship goods that are in low demand in China. As a result, these nations are still inextricably linked to the US economy. In other words, Central America, whose exports are primarily soft commodities, has not benefited from the so-called “China effect” on hard commodities. 

 

President Barack Obama has asked Congress to triple its economic aid to Central America with a contribution in the amount of one billion dollars. The authorization will take place on Monday, February 2.

The U.S. Aid

High levels of poverty and unemployment, unstable political and judicial systems, pervasive drug trafficking and violence, and high homicide rates have all been problems in some Central American nations. As mentioned, the subregion is now a significant source of immigration to the United States. The Departments of State, Agriculture, and Defense, as well as the U.S. Agency for International Development, work in the region to “help” address these issues. For instance, these organizations provided about $3.7 billion USD in assistance between FY 2013 and FY 2018, which was used to support initiatives to reduce violence and boost economic opportunity. Approximately $1.7 billion USD of the $3.7 billion USD allocated was left over as unobligated balances or unliquidated obligations. In the most recent fiscal year, 2016, through the most recent fiscal year, 2018, the agencies distributed 92% of the funds that still needed to be expended. The regional programs in Guatemala, Honduras, and El Salvador received the largest financial allocations from the agencies.

The Biden administration promised a significant infusion of funding to address the reasons behind Central American irregular migration. The plan is to spend a total of $4 billion USD to address the issue, with the first phase of this policy costing $860 million USD in 2022. There is some evidence from academic studies that foreign aid can reduce migration, though the effect is typically modest, and the outcomes depend on the type of aid. For instance, a 2018 study found that a 10% increase in aid to support a country’s improvement of social services and governance would result in a 1.6% decrease in that country’s emigration rate. In contrast to other forms of assistance, management and aid for rural development have been found to be slightly associated with lower emigration rates. Academic studies examined the effectiveness of the Biden administration’s strategy. A rise in American migration results from the low GDP per capita in Central American nations like Guatemala, El Salvador, and Honduras. This is the rationale behind the Biden administration’s massive financial commitment to these nations’ economies.