CENTRAL AMERICAN COMMON
MARKET (CACM)

The Central American Common Market (CACM) was established in 1960 with the signing of the General Treaty of Central American Integration at Managua, Nicaragua. The original signatories of the treaty, which became effective June 3, 1961, were El Salvador, Guatemala, Honduras, and Nicaragua. Costa Rica joined the market in 1962. Panama has observer status in the market and along with Belize participates in the CACM summits, but neither are involved in regional trade integration activities. Including Panama the CACM encompasses a market of 31 million people with a combined gross domestic product (GDP) of over $92.8 billion, for an average per capita GDP of approximately $2,984.

THE EARLY YEARS

The CACM had its beginnings with the Committee for Economic Cooperation of the Central American Isthmus, which formulated the Central American Economic Integration Program of 1952. This economic coalition led to a series of agreements including: the Agreement on the Regime for Central American Integration Industries (1958), the Multilateral Treaty of Central American Free Trade/Economic Integration (1958), the Central American Agreement on the Equalization of Import Duties and Charges (1959), and the Protocol on Central American Preferential Tariff (1959). The tenets of these agreements were folded into the CACM treaty of 1960.

INFIGHTING HAMPERS DEVELOPMENT

Almost from its inception there were military, political, and economic problems plaguing CACM. A number of plans were initially enacted to deal with these problems and promote economic integration. Among these ill fated plans were the creation in 1961 of the Central American Clearing House and the 1964 creation of the Central American Monetary Council. The latter integrated many operations of the central banks of CACM members and established the peso centroamericano as the standard unit of exchange. The Central American Clearing House ultimately failed to reach its goal of coordinating the domestic economy of CACM members and was unable to control the movement of capital between member countries. The peso centroamericano was never accepted as a unit of exchange on the world market. Internally the unit existed only as a yardstick for exchange rates. By 1966 any economic progress being made by the CACM countries came to a halt as severe balance of payment problems plagued the economy of many members. All CACM members were in debt to one another and were behind in their payments because of declining exports and reductions in import revenues. By 1967 the CACM members were posting record deficits. Many members reacted by taking unilateral protective measures, which led to further long-term balance of payment problems.

In 1969, during its war with El Salvador, Honduras unofficially withdrew from the CACM and in 1970 began imposing tariffs on imports from CACM member nations. This continued until the signing of the 1980 peace treaty by Honduras and El Salvador. The treaty was accompanied by pledges from Honduras to resume full CACM membership and cooperation. In 1979 Nicaragua and El Salvador underwent internal political upheavals, and strained relations between Costa Rica and Nicaragua caused frequent border closings.

These political, economic, and military problems soon halted what little progress was being made toward CACM goals of establishing a common external tariff on goods imported from nonmember countries and dismantling internal tariffs on intraregional CACM trade. In the 1970s and 1980s intraregional CACM trade declined. By 1981 worldwide recessional forces were adversely affecting CACM members and extraregional exports began to decline as well. In 1982 the gross domestic product of all CACM countries fell as a result of budget deficits and inflation.

ASSOCIATION WITH THE EUROPEAN
UNION

A 1985 economic agreement with the European Community (now called the European Union) failed to spark an anticipated economic revitalization of CACM countries, but it did provide the impetus for the formation of the Central American Parliament in 1986. This body is modeled after the European Parliament which serves as a consultative body to the European Union. The two parliaments have formed cooperative economic ties between the European Union and CACM.

RETURN TO ORIGINAL GOALS

Summit meetings in the early 1990s began refocusing on economic integration by emphasizing the organization's original mission: lower tariffs, infrastructure improvements, and the dismantling of various technical trade barriers. In 1 992 the System of Central American Integration was created to foster greater cooperation on political and economic matters. Other discussions focused on trading with common markets outside of the region and establishing various free trade zones. Suggested solutions to CACM economic stagnation included increasing extraregional exports, restructuring foreign debts, stabilizing exchange rates, and implementing a common external tariff.

The CACM is one of six regional trade arrangements in the western hemisphere (the others are the Andean Pact, the Caribbean Community and Common Market, the G-3, the North American Free Trade Agreement [NAFTA], and the Southern Common Market). Because of the economically damaging "lost decade" of the 1980s, these trade arrangements, including CACM, have liberalized their trade policies. The United States has generally encouraged trade liberalization in the region.

Between 1989 and 1992 American exports to Central American countries increased 61 percent and the stock of U.S. investment in Central America in 1991 was $11.8 billion. The U.S. trade surplus, however, almost doubled during this period, from $676 million to $1.3 billion. Despite attempts by Central American countries to implement trade liberalization measures, progress was hampered by disparate economic conditions, unemployment and inflation, and low wages.

REVIVAL OF TRADE

Since the early 1990s, however, there has been somewhat of a revival of trade in Central America. This turnabout is attributed to general peace in the region—especially the decline of Marxist guerrilla influence—and a concentration on microeconomic policies such as deregulation and harmonized taxes. Many of these policy reforms came about because of Harvard economist Michael Porter, who preached that the region should concentrate on microeconomic reforms aimed specifically at boosting productivity. This has played a part in an annual economic growth rate of about 3 percent and a doubling of intraregional exports between 1991 and 1995 to about $2.8 billion, with total exports climbing from $8.6 to $14.1 billion.

Since its founding in 1963, however, CACM regional integration has been greatly hamlpered by dissension and the inability of its members to trade freely with each other. Costa Rica, the wealthiest CACM member is, for example, fraught with zoncern over being deluged with cheap goods from its less-well-off neighbors. CACM, however, has souglit freer trade with the United States and is wary of NAFTA, of which it is not a part.

CACM policy is made at the regular meetings of the ministers and vice ministers of Central American Integration. There is also a permanent scecretariat that handles CACM operations including: institutional common market support, execution of economic integration policies, and research at the request of the common market. CACM has two financial institutions: the Central American Bank for Economic Integration, which finances development projects both private and public, and the Central American Monetary Council, which coordinates monetary policy.