CENTRAL AMERICA, DOING BUSINESS
IN



Bridging North America and South America, Central America includes Belize, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Panama and has a population of approximately 31 million people. An alternative classification of Central America preferred by the United Nations includes Mexico in this term, too. Located between the Caribbean Sea and the Pacific Ocean, all of the countries in Central America are independent republics, except for Belize, which achieved its independence from Britain in 1981 and is a member of the Commonwealth of Nations. Consequently, Spanish is the national language of all the countries in Central America, except for Belize, where English is the national language. Nevertheless, numerous indigenous inhabitants of Central America still speak their native languages.

Belize also is the only country in Central America that belongs to the Caribbean Community and Common Market (CARICOM); it has not joined with neighboring states in the Central American Common Market (CACM). The members of CACM are Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua. Like Belize, Panama also has not become a member of CACM.

Despite the cultural, linguistic, and even ethnic homogeneity of most of Central America, there has been almost continual discord and disunity among the states. When Spanish colonial rule ended in 1821, all seven Central American nations attempted to join together politically, but this effort ended in dissolution in the 1830s. Thereafter, the nations attempted to establish independent governments. Belize succumbed to British colonialism in 1862. Costa Rica, where land was most equitably distributed of all the Central American nations, became the most stable state in the region, and consequently, the most prosperous and advanced. Warring persisted, however, in El Salvador, Guatemala, Honduras, Nicaragua, and Panama, all of which were ruled by a succession of military dictatorships until well into the 20th century.

Because of the tropical climate, agriculture remains the largest industry in Central America. Key cash crops include bananas, sugar, coffee, rubber, cocoa, and coconuts, but a small, wealthy landed elite controlled the production of these crops for much of Central America's modern history. The wealthy leaders in turn became officers in the armed forces and exercised despotic control over the rest of the populace in their respective states. The result has been a long legacy of political oppression and dire poverty in this region, with the exception of democratic Costa Rica and sparsely populated Belize.

Central America also is rich in minerals, which first attracted European settlers to the region. Honduras and Nicaragua both contain gold and silver. In addition, Honduras has large deposits of copper, lead, iron ore, and zinc, whereas Nicaragua has large deposits of natural gas. Guatemala contains nickel as well as petroleum deposits. Furthermore, Panama has substantial copper deposits. Nevertheless, mineral outputs in Central America remain small.

Over the years, the United States has been Central America's primary outside investor and leading trading partner, followed by Western Europe. Central America's leading imports include cars, chemicals, electrical equipment, farm machinery, and pharmaceuticals, while its leading exports include bananas, coffee, cotton, meat, wood, and rubber.

Despite its history of instability and strife, much of Central America seemed on its way to economic recovery in the latter half of the 1990s as civil wars in El Salvador and Guatemala finally ended and the previously war-driven countries took steps towards strengthening their economies and reducing poverty. But Hurricane Mitch, which struck Central America in the fall of 1998, hindered the progress of some of these countries, notably Honduras and Nicaragua, leaving carnage and widespread destruction in its wake.

INSTABILITY IN CENTRAL AMERICA

With the growth of middle classes in the region during the 20th century, the control by the wealthy elites came under attack in every country by the middle of the century. As a result, war plagued most Central American countries throughout the century. Furthermore, during the Cold War, the United States and the Soviet Union often backed rival factions, impeding the region's growth and development and adding to its poverty and misery, especially in El Salvador, Nicaragua, and Guatemala. As a result, Honduras, Costa Rica, and Belize suffered from the influx of hundreds of thousands of refugees fleeing civil war in El Salvador and Nicaragua, and the Guatemalan military's war against its Indian population in the 1980s. Although the region established the Central American Common Market in the 1960s, Central American countries failed to achieve economic and political cooperation because of widespread conflict, violence, military uprisings, and human rights violations that continued through the 1980s. The strife cost the lives of tens of thousands of civilians and caused extensive damage to these Central American economies and infrastructures.

POST-COLD WAR CLIMATE

Accordingly, many American businesses have been skeptical about doing business in this unstable region despite its proximity to the United States. The fall of communism in the Soviet Union and the end of the Cold War, however, triggered a dramatic transformation in Central America. Guatemala has gone from one of the most repressive military dictatorships in Latin America to a new democracy in which Nobel Peace Prize winner and military critic, Ramiro de Leon Carpio, became head of state in 1993. The government and the Guatemalan rebels signed a peace accord in 1996 after 35 years of civil war. In 1992 the guerrillas in El Salvador handed over their Soviet-made weapons to United Nations' peacekeepers and the warring factions signed a peace agreement, bringing the 12-year civil war to an end. The Sandinistas in Nicaragua conceded after electoral defeat in 1990. Guatemala and Belize have settled a serious but little-known border dispute, decreasing tensions between them and increasing economic cooperation. Finally, five Central American nations have revived the defunct Central American Common Market and made it an instrument of economic empowerment. Free market reforms and economic liberalization are evident in every Central American nation.

As in so many regions of the world, the late 1990s witnessed an unusual trend—away from military rivalry towards aggressive economic competition. To win in the economic sphere, hitherto disparate nations have played down their national differences in favor of regional economic cooperation. In the Western Hemisphere, the North American Free Trade Agreement (NAFTA) has been approved, and 21 Latin American nations have vowed to forge a similar economic pact in the future. In the Caribbean, the Caribbean Community and Common Market has been revived; in Central America, the Central American Common Market.

ADVANTAGES OF DOING BUSINESS IN
CENTRAL AMERICA

Hence the disadvantages of Americans doing business in Central America, with its recent instability and its history of conflict, must be weighed against the advantages, and against the increasing economic presence of Asians and Europeans in the economies of Central America.

A powerful attraction to doing business in this area is the high unemployment rate in every Central American country except Costa Rica, which translates into a cheap pool of labor that drastically reduces the cost of manufacturing. Most American businesses in Central America produce for the U.S. market, rather than for the meager domestic markets. But a small company that can manage to make a profit from shipping small quantities of products can do lucrative business in regional markets, provided it finds the right niche. All Central American countries, including relatively affluent Costa Rica, have a constant need for construction material of all kinds, cooling and refrigeration units, computers and software, and medical and diagnostic equipment. Tourism is also a booming industry in Central America. The Central American infrastructure, even within a poverty-stricken country such as Honduras, is superior at this point in time to that found in most parts of South Asia and Africa.

While Belize is not a member of the Central American Common Market, it does belong to its Caribbean counterpart, CARICOM. An advantage of doing business in Belize for the small company is the possibility of having a trade link with the European Union, which is a difficult link for a small firm that lacks international marketing experience to establish. CARICOM has created the Caribbean Council for Europe, which enables any company doing business with a CARICOM member to avail itself of a private pipeline to the Western European market.

While there still is endemic poverty in Central America, poverty levels continue to drop as Central American economies continue to develop. The gross domestic product (GDP) of all seven states rose in the 1990s and Central America experienced genuine economic revitalization. In addition, English is widely used in business, and American investment is warmly welcomed everywhere.

The inception of the Caribbean Basin Initiative (CBI), which Congress passed in 1983 (as part of the Caribbean Basin Economic Recovery Act), is beginning to turn American business in the direction of the Caribbean region and Central America, which borders the Caribbean. Most recently, Nicaragua was made eligible to become a recipient of the benefits of the CBI. The CBI has dramatically promoted economic reform and liberalization in the Caribbean/Central American region. Highlights of CBI are duty-free entrance into the United States of 94 product categories manufactured in the Caribbean and Central America; the establishment in this area of development banks, chambers of commerce, and free trade zones; the funding of job training and self-help programs; and very importantly, the provision of easy-term financial assistance to U.S. companies doing business in the region.

Businesses wishing to trade merchandise with Central American countries can obtain assistance through the Export-Import Bank (EXIMBANK), which provides loans, credit insurance, and loan guarantees to foreign buyers. By providing outside buyers with loans, EXIMBANK facilitates trade between the United States and other countries. The U.S. Department of Agriculture also offers a credit program with some Central American countries to promote the trade of agricultural products. Finally, the U.S. Small Business Administration provides programs designed to help small businesses export their products to other countries, including those in Central America, by offering loans and loan guarantees. Other government agencies also provide assistance and incentives for doing trade in Central American and the U.S. Department of Commerce can provide a list of these agencies.

The U.S. government also offers special incentives for doing business in this region via the Section 936 program. A company that does a major portion of its business in the Caribbean/Central American area can qualify for Section 936 of the Internal Revenue Code, which exempts it from federal income tax on earnings that are derived from its business in this region. In addition, such institutions as the Overseas Private Investment Corporation, as well as EXIMBANK, provide financial assistance to businesses wishing to invest in Central America.

THE CENTRAL AMERICAN COMMON
MARKET

With the end of the Cold War and spread of regional peace, five of the Central American states (Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua) have revived and strengthened the Central American Common Market (CACM). The CACM has eliminated trade barriers within the five member states and is working on developing a common foreign trade policy. Individually, the member states have designated free trade zones (including Panama, which does not belong to CACM) that offer foreign companies establishing their businesses there exemptions from import and export taxes, and in some cases (as in Costa Rica), elimination of income taxes for a certain number of years.

CENTRAL AMERICAN MARKETS AND
OPPORTUNITIES

BELIZE.

The United States remains Belize's leading trading partner, accounting for 46 percent of the country's exports and providing 52 percent of all of the country's imports, according to the U.S. Department of Commerce. Overall, the United States maintained about a $55 million trade surplus with Belize in the late 1990s. Consequently, Belize offers significant business and trade opportunities for U.S. companies and investors. Since Belize has such a small economy, the Commerce Department recommends establishing a relationship with a local importer or wholesaler to serve as an agent and distributor in Belize. In the late 1990s, leading U.S. exports to Belize included food processing and packaging equipment and consumer products.

COSTA RICA.

The most developed economy in Central America, Costa Rica offers foreign investors and businesses a relatively well educated and productive workforce as well as a stable country and economy. Because of these characteristics, Costa Rica continues to court high-tech industries, including the computer industry. As a result, companies such as Intel Corporation have opened plants in Costa Rica. In addition, there are at least 130 U.S. companies operating in Costa Rica because of its infrastructure and workforce. The country also has a thriving tourism industry. Leading areas for investment and trade include automotive parts, computer equipment, construction, health care services, hotels, and telecommunications equipment.

EL SALVADOR.

With the end of its civil war, El Salvador seems poised to promote additional economic growth in the late 1990s. During this period, the government decreased its military expenditures and devoted these funds to social and economic reform. The U.S. Department of Commerce expects ongoing economic expansion with opportunities for U.S. businesses and investors. Because of its inexpensive labor, liberal investment laws, and growing industrial sector, El Salvador became a competitive source for raw materials and partially finished products. In addition, the country's demand for automobiles and parts, processed foods, and construction and engineering services rose sharply in the late 1990s. Furthermore, the country's government plans to privatize El Salvador's electricity, water, and telephone services, which will offer U.S. investors new opportunities.

GUATEMALA.

With its 10 million people, Guatemala is the most populated country and has the largest economy in Central America. Because of the peace accord ending the civil strife, Guatemala holds the potential for being another source for business and investment by U.S. companies. U.S. products and services already have strong name recognition and a reputation for quality in the country. Consequently, about 50 percent of Guatemala's imports come from the United States. Nevertheless, the country's economy remains competitive and price sensitive. But Guatemala continues to welcome outside investment and has few investment restrictions, allowing the United States to be the country's dominant investor. Some export and investment opportunities include telecommunications equipment and services, electronic equipment, computer equipment, and automotive parts.

HONDURAS.

Honduras, though one of the most impoverished countries in Central America, also offers a variety of opportunities for businesses and investors. With its proximity to the United States, its various modes of transportation to the United States, its private commercial banks, and its inexpensive labor pool, Honduras offers U.S. businesses and investors a strong market in Central America for trade and manufacturing. The United States already accounts for about 50 percent of the country's imports, highlighting the commercial link between the two countries. Some of the leading business opportunities in Honduras include electricity generation to meet the growing demand, telecommunications services, road and highway construction, housing construction, computer equipment trade, and automotive parts trade. Honduras also has made an effort to reduce or abolish import duties and surcharges. In addition, the Overseas Private Investment Corporation and the U.S. Agency for International Development provide programs for investing and doing business in Honduras. For small but important projects, there are even government aid programs. The Honduran Consulate General in New York City is the best place to turn to for information.

NICARAGUA.

Nicaragua appears to be recovering from years of conflict and violence, with its economy and GDP rising steadily in the late 1990s. To encourage trade, the government reduced tariffs and eliminated other trade barriers in the late 1990s. Nicaraguan consumers have an affinity for U.S. products and services and U.S. goods accounted for about 33 percent of the country's imports during this period. Privatization also is well under way in Nicaragua, and purchasing a former state-owned enterprise can present a profitable business option. Nicaragua has a large labor pool desiring work, another advantage to doing business here. In addition, Nicaragua boasts of successful free trade zones, and offers many tax exemptions to foreign businesses. Because the country is predominantly an agricultural economy, the Nicaraguan market has strong demand for farm chemicals and equipment, fruits and vegetables, and food processing and packaging equipment as well as increasing demand for cars, communications equipment, and medical supplies.

PANAMA.

Because of its central location and the Panama Canal, Panama has long been a major player in international trade and business. Despite the country's strong business and trade relationship with the United States, Panama also does business with numerous other countries that compete with the United States in the trade of cars, clothing, consumer electronics, and telecommunications equipment. Nevertheless, U.S. goods and services are well received in Panama. Panama's leading areas of growth potential include electricity generation, health care services, telecommunications services, and tourism.

INVESTIGATING OPPORTUNITIES IN
CENTRAL AMERICA

As can be seen from the above, there are numerous business and investment opportunities in Central America, each of which has its individual advantages and disadvantages. Nonetheless, setting up shop in Central America is no guarantee of a successful business. Anyone wishing to establish a business there must be sure that there is a viable niche for that business in the chosen country. This means locating information about the chosen locale to find out the shortcomings as well as benefits of doing business there.

A good place to start is the U.S. Department of Commerce publication, Caribbean Basin Financing Opportunities: A Guide to Financing Trade and Investment in Central America and the Caribbean, which can be obtained by mail or at one of the 68 district offices of the Department of Commerce, each of which has abundant information and offers assistance in doing business abroad. Another source of assistance is the Latin America/Caribbean Business Development Center in Washington, D.C., which offers many publications to the public, as well as one-on-one counseling. In addition, there is the Overseas Development Council in Washington, the trade sections of the embassies of each of the Central American states, and other Central American-based offices (and Central American business offices in the United States), a list of which can be obtained through the Department of Commerce.

Whatever type of business and whichever Central American locale a company selects, it must obtain exhaustive knowledge about transportation costs, repatriation of profits, and which banks take American dollar deposits (not all of them do). This research will necessitate a personal investigative business trip and a local contact. It is imperative to have a native lawyer (or law firm) or accountant who can steer through the maze found in most Central American bureaucracies. Business in Central America still proceeds via personal contacts, except in the tourist industry.

A recommended first step in doing business in Central America is to set up a joint venture with a native-based company that knows the market, laws, and local ways of doing business and can initiate further business opportunities. The trade section of the embassy (or consulate) of each Central American country can establish contacts with representatives or firms. In addition, the need for marketing and advertising may be minimal, since many new products are introduced in the numerous trade fairs held annually in the region.

REBUILDING CENTRAL AMERICA

When Hurricane Mitch struck Central America early in the fall of 1998, it left much of the region devastated. The hurricane destroyed not only the region's homes and businesses and took thousands of lives, it also demolished the region's infrastructure and made some countries in the region even more dependent on outside aid. The main countries hit by the storm included Honduras and Nicaragua, which suffered the most damage, as well as El Salvador and Guatemala. In all, Hurricane Mitch claimed about 16,000 lives and caused damage that could take years and billions of dollars to repair.

Furthermore, the hurricane destroyed the cash crops of the countries hit. As a result, entire coffee and banana plantations were ruined, requiring some farmers to replant their trees, which take years to mature. Hurricane Mitch also strained the economies of already debt-burdened countries, forcing them to borrow more money and seek debt relief from their creditor nations such as the United States, France, and the United Kingdom. For example, Honduras owed about $4 billion and Nicaragua about $6 billion in late 1998. Meantime, Honduras's GDP is only about $4 billion and Nicaragua's about $2 billion.

As a consequence, some business, trade, and investment opportunities in these countries might be hindered in the short term. These countries require time to rebuild their roads, communication networks, farms, and so forth. Because of the hurricane, these countries most likely will depend on outside aid and assistance for some time.

FREE TRADE AREA OF THE AMERICAS

While the United States, Canada, and Mexico established NAFTA and implemented it in 1994, Central and South American countries remained outside this liberalized trade network. Wishing to participate in intercontinental trade, these countries appealed to the United States and other North American as well as South American countries to establish trade alliances with them. As a result, North, Central, and South American countries began to hammer out a new trade agreement known as the Free Trade Area of the Americas, with the goal of implementing the agreement by 2005. The 34 participating countries are trying to develop multilateral trade policies that will benefit not only the wealthier countries but also the poorer ones. Some of the proposals for a free trade zone that would span the Western Hemisphere roughly call for expanding NAFTA to include Central and South America.

SEE ALSO : Caribbean, Doing Business in the

[ Sina Dubovoy

updated by Karl Heil ]

FURTHER READING:

Arana, Ana. "The Dogs of War Make Way for the Pigs of Peace." Business Week, 13 April 1992.

Baker, Stephen. "Back to Nature in Belize." Business Week, 3 February 1992, 86.

"Central America Opens for Business." Economist, 21 June 1997, 35.

"El Salvador." LatinFinance, September 1993, TF91.

Holman, Richard L. "Honduras Sets Privatization." Wall Street Journal, 4 March 1994.

Howell, Alvaro R. Castellanos. "Guatemala: Right on Track." LatinFinance, October 1993, 69.

"The Long Term." Economist, 14 November 1998, 37.

Lordan, Betsy. "Consulate to Lure Florida Investors to Belize." South Florida Business Journal, 5 October 1992, 13.

Luxner, Larry. "Customs Harmonization in Priority at Hemispheric Free-Trade Discussions." Journal of Commerce, I June 1998, IA.

STAT-USA. Country Commercial Guides. Washington: STAT-USA, 1998. Available from www.stat-usa.com .

Tuller, Lawrence W. Doing Business in Latin America and the Caribbean. New York: AMACOM, 1993.



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