Neil Shenai, Escaping the Governance Trap: Economic Reform in the Northern Triangle. Palgrave Macmillan, 2022.
Price USD $49.99 |152 pages
One of the major issues facing the United States is migration from what is now called the Northern Triangle of Central America—composed of El Salvador, Guatemala, and Honduras. These three countries have a combined population of around 34 million, some of the lowest living standards in the Western Hemisphere. They also suffer from political corruption and high levels of violence. Neil Shenai, who served as the U.S. Treasury’s Financial Attaché in Mexico and Central America from 2016-2018, has written a book, Escaping the Governance Trap: Economic Reform in the Northern Triangle, which addresses what he regards as the main problem facing the Northern Tier countries—a failure in governance that has left the region bleeding people.
According to Shenai, El Salvador, Honduras, and Guatemala are entangled in a governance trap, which he defines as “a path-dependent equilibrium in which weak states with contested authority fail to penetrate civil society and achieve self-sustaining economic growth, resulting in states that undersupply political order and economic opportunity.” Central to Shenai’s governance trap framework are the following propositions:
- The state is an autonomous organization with a monopoly on the use of legitimate force;
- Northern Triangle countries have weak states due to their contested monopoly of violence and need to improve their “Weberian stateness,” the latter of which is a reference to Max Weber’s The Protestant Ethic and the Spirit of Capitalism, where the development of states reflects a cost-benefit analysis of citizens seeking to avoid a Hobbesian “state of nature.”
- State capacity is a composite “of activities of a state’s scope of activities pursued and coercive ability.” Moreover, some combinations of state scope and strength are better at promoting high governance than others.
- Bad institutions and good institutions strongly exhibit path-dependent qualities. This means that initial conditions matter in putting a country down one developmental path or another.
- It is possible to “get to Denmark” with the right policy intervention. This, in many regards, is the critical message of the book. For Shenai, getting to Denmark–having a modern liberal democracy that balances the key institutions of the state, the rule of law, and accountable government—should be the endgame for any state as “states that are more responsive to the needs of the public are generally better at public goods provision than less responsive ones; that a minimum level of state strength is necessary for economic development; and that the rule of law is a key determinant of a country’s economic climate and thus its attractiveness as a destination and platform of economic development.”
Considering the poor governance record of the Northern Triangle countries, is it possible for them to get to Denmark? According to Shenai, “Northern Triangle countries can get to Demark (or achieve lasting economic and political development) with the right set of domestic and institutional factors, including by improving stateness, the rule of law, and accountability.” He is careful to note that there is no “silver bullet” in the developmental game, but that domestic reformers and their allies “should also expect politicians to behave rationally and should thus focus on altering their cost-benefit calculi to promote collective action over graft and patronage to mitigate the politician’s dilemma.”
Escaping the Governance Trap reviews fiscal policy, monetary and exchange rate policy, and structural reforms. Although measures such as greater transparency and disclosure in the fiscal process, reducing vulnerabilities, and safeguarding monetary and exchange rate stability will help get to Denmark, Shenai admits that the scope of work ahead is considerable. Additionally, international actors, friendly governments, and multilateral institutions can help these countries reach their targets.
One of the more noteworthy parts of the book is an annex to the second chapter, which discusses the Salvadorean government’s decision to adopt Bitcoin as the national currency in 2021. President Nayib Bukele’s reasoning for the change was to help reduce financial transaction fees, especially for cross-border transfers, and enhance financial access. While some heralded El Salvador’s adoption of Bitcoin as the dawn of a new day, the reaction from the IMF, World Bank, and Moody’s rating agency was generally negative.
For Shenai, Bitcoin “is a speculative asset that derives its value from reflexive market dynamics in which market participants believe that other market participants believe holds value.” He warns that if Bitcoin underperforms or is poorly managed it could augment perceptions of El Salvador as a risky financial jurisdiction. Considering the high level of cryptocurrency volatility as well as the FTX debacle and the embarrassment it caused the Bahamas, there are considerable risks to adopting Bitcoin as the national currency. It probably does not bode well as a national policy considering that most Salvadoreans refuse to use it in their daily transactions, preferring the U.S. dollar.
The book also dedicates space to external actors—such as Canada, the United States, and Mexico—as well as the diasporas of each country that can help enhance governance and economic development in the region. For the U.S., he believes that working through multilateral organizations has value, though in some cases a unilateral approach is a better option. On the latter, he points to money laundering as the U.S. often has better capacity in punishing bad actors, especially if they launder their money or stash their ill-gotten assets in the United States.
The book has much to offer policymakers, but is heavily geared to an academic audience, with a considerable review of the literature pertaining to state development. The sections on Bitcoin in El Salvador and U.S. policy in Central America are well worth the read. However, the book could have used a brief chapter on Central America’s historical development. It would have provided a useful context to the rest of the book, which would have given its message more weight. History does play a role in how countries face development challenges, especially if they want to get to Denmark. Shenai ends on a hopeful, though hedged concluding comment: “Ultimately, the future will depend on the political will of the Northern Triangle populations and the willingness of international partners to grasp their outstretched hands.” This book is recommended to academic audiences and policymakers, especially those engaged in economic development and governance issues.
Scott B. MacDonald is the chief economist at Smith’s Research & Gradings, Research Fellow at Global Americans, and founding director of the Caribbean Policy Consortium. His latest book, The New Cold War, China and the Caribbean, was recently published by Palgrave Macmillan.