From 2005 to 2015, Central America grew by a yearly average of 4.3 percent, proving resilient to the international financial crisis and more recent turmoil in financial markets worldwide. Yet, this moderate growth has not been matched by advances in competitiveness and productiveness, leaving a lot of room for improvement. In recent years, some companies have initiated or expanded operations linking the region with global markets. The public sector has been slow to take full advantage of their potential.
Now it’s up to governments and regional institutions to create policies that foster the development of regional value chains and to boost productivity and competitiveness.
Central America’s strategic location and proximity to the U.S. have helped spark market-driven regional value chains, with just one example being the sports apparel industry in the northern part of Central America.
A combination of competitive salaries and the availability of special economic zones have contributed to the development of the sector, which now involves a wide range of operations including: the spinning, weaving and finishing of textiles; textile cutting and apparel assembly; full-package production; labeling and packaging; and retail. As a result, exports from the textile industry rose to $2.5 billion in El Salvador, $1.59 billion in Guatemala, and $4.09 billion in Honduras in 2015.
Illustrative of the potential for development inherent in these chains is the recent announcement by Nike that it had acquired suppliers in North and Central America to increase its regional manufacturing capabilities and to enable faster delivery of materials and finished products. The latter wouldn’t have been feasible or of interest if the regions weren’t so close geographically. The investment will bolster Central American capabilities and increase the value-added products’ share in total textile exports, which rose from 34 percent in 2006 to 42.7 percent in 2016 in Guatemala alone, according to the Clothing and Textiles Commission (VESTEX).
A more disruptive example of strong regional value chain is in the aircraft services company Aeroman. The El Salvador-based firm offers a broad range of airframe heavy maintenance and modification services for Airbus and Boeing aircrafts. As the operations hub for Avianca Airlines, El Salvador is a proximate lower-cost option for operators in the region looking to send their fleets off for maintenance. The result: Aeroman has grown to serve around 140 heavy maintenance visits annually.
A regional productivity agenda
To foster the development and growth of higher value-added production and trade, the region needs to bolster its competitive advantages and create improved conditions for investment and the strengthening of regional value chains.
As the Global Competitiveness Index (GCI) of the World Economic Forum (WEF) has noted, Central America has only showed a modest increase in its competitive environment. Its competitiveness rating has risen only 0.6 percent in the past decade, from 3.91 in 2006 to 4.12 in 2015. And while most countries raised their overall score—with Costa Rica, Guatemala, and Panama the best performers—only two of the region’s economies rank in the top 60 of countries in the index: Costa Rica and Panama. To ensure further advances, national governments need to focus on socioeconomic factors, such as labor market efficiency, health and education coverage, the availability of finance for growth, and the ease to set up a business and export goods and services.
Market-driven value chains are a product of Central America’s economic integration. However, to develop further, governments and policies need to identify specific industries to expand and deepen integration. The Economic Commission for Latin America and the Caribbean (ECLAC) and the Secretariat for Central American Economic Integration (SIECA) have led the effort to identify industries with the greatest potential being strengthening the existing regional value chains and their connection to global markets. Based on external demand, complementarities between countries in the region, and other factors including the value-added component of these industries, an early selection of some of these chains included: tourism; food preparation; personal, cultural and recreational services; dairy; bovine meat; and cacao.
Supporting their development will be an issue of continuing work at the regional level. But acting at the regional level can also be more conducive to attracting interest in a larger market, reducing the risk for investors, and taking advantages of our complementarities.
Javier A. Gutiérrez is the Executive Director of the Secretariat for Central American Economic Integration (SIECA). You can follow him on Twitter @jantgut.