The CAFTA Question: Creating Growth or Entrenching Poverty?

Transcription

1 The CAFTA Question: Creating Growth or Entrenching Poverty? By Jill Rauh with contributions by Alexandra Spieldoch and Kristin Sampson Gender, Trade and Development Project, Center of Concern Chair of U.S. Gender and Trade Network August 7, 2005

2 Introduction On August 5, 2004, trade ministers from the U.S., Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic, completed the United States-Dominican Republic-Central American Free Trade Agreement. i It has since been ratified in El Salvador, Honduras, Guatemala, and the U.S. and is pending in Nicaragua, Costa Rica and the Dominican Republic. The Preamble of the U.S.-DR-CAFTA states that a major goal of the agreement is to create new opportunities for economic and social development in the region. 1 The Central America-Dominican Republic region is one that is very much in need of economic growth and social development. Five of the six countries from the region who are partners to the agreement rank among the lowest economic performers in all of Latin America and the Caribbean. Poverty rates and social indicators indicate that malnutrition and unemployment are high, while education is low. 2 If the U.S.-DR-CAFTA could bring the growth and development it promises, then the agreement could be an important tool in turning around a bleak situation. But will the implementation of free trade in Central America and the Dominican Republic bring about economic growth and development? Unfortunately, the answer is no. In the negotiations for agreements such as the U.S.-DR-CAFTA, social questions and truly equitable development continued to be seen as secondary to the establishment of a laissez faire model of trade that can benefit the most powerful parties involved. Pre-conditions, such as the presence of certain mechanisms and institutions, which can greatly increase the likelihood of successful development as a result of economic policymaking, were largely ignored in the negotiations. This paper offers some reflections on what is generally missing in the U.S.- DR CAFTA as it relates to the value of the human person and sustainable development. It also reviews whether Central America and the Dominican Republic meet the pre-conditions for i The U.S.-CAFTA had been completed on May 28,

3 economic growth and development and whether the agreement itself is helpful in promoting these ends. The conditions and institutions necessary for successful development are explored as well as some specific social concerns in the U.S.-DR-CAFTA. For simplification of terms, from this point forward, DR-CAFTA will be used to refer to the free trade agreement between the United States, Central America, and the Dominican Republic (U.S.-DR-CAFTA) and reference to Central America-DR will mean Central America and the Dominican Republic. When does trade work best? Trade, done in the right way, has the potential to help boost the economies of povertystricken countries. Benefits from trade can include increased investment; access to intermediate goods that may not have previously been available domestically, at least not cheaply; the transfer of technology and ideas; and new foreign direct investment and access to savings. However, as Dani Rodrick, a professor of international political economy at the John F. Kennedy School of Government at Harvard University, writes, these are only potential benefits, to be realized in full only when the complementary policies and institutions are in place domestically. 3 When trade liberalization policies are developed and implemented out of context of a larger understanding of development (also including fiscal and monetary controls), it becomes a myopic endeavor. Similarly, when trade rules are developed without human rights and sustainable development as central concerns, they run the risk of worsening the benefits of trade for developing countries. This has been and continues to be a major concern in the DR- CAFTA discussion as well as other free trade agreements which have been or are being negotiated. Although DR-CAFTA includes provisions for the environment and labor, these are weak. Furthermore, their development has been secondary to the overall process of negotiations. Little gender analysis has been considered in the agreement. And, overall human rights concerns such as the right to education, health, water, access to medicines, work, 2

4 equality, etc. are not addressed at all apart from an underlying assumption that growth will some how address these areas in a positive manner. There is, in fact, no guarantee that growth will be able to address these serious concerns and it is instead likely that human rights concerns and sustainable development needs will increase as a result of the agreement. Statistical evidence is lacking to support the common assumption that neo-liberal growth leads to the eradication of poverty, hunger, poor health, and environmental degradation. In some cases, increasing the openness of markets has actually worsened the conditions of poverty in countries. Poverty has increased in the 49 least developed countries which have both open and closed market policies. In 22 of the 39 least developed countries for which data was available in 2002, trade accounted for over half of their GDP, making it clear that the presence of greater trade alone did not succeed in pulling these countries out of poverty. Other studies show that poverty actually increased more in countries that liberalized significantly than in those that comparatively did not. 4 One lesson to be learned from the disappointing results of trade liberalization is that for regional integration to be effective, it must take into account the specific needs of the trading countries in order that they gain from the transaction. With the DR- CAFTA, this has not been the case. Negotiators have not incorporated proper safeguards to ensure that Central American countries are able to lift their populations out of poverty and achieve sustainable development. Free Trade Agreements (FTAs) such as the DR-CAFTA, which lock countries into a broad set of rules that encourage liberalization without providing countries adequate safeguards and domestic regulations to protect their peoples, worsen the poverty gap between developed and less developed nations, and promote greater inequity and instability. Additionally, when civil society groups, including human rights, women s, labor rights and environmental groups are not considered partners in the policymaking process of trade negotiations, market-oriented policies ignore not only the important analysis and experience of the communities, but deny people of their right to information which will have a profound impact on their lives. Trade rules need to be 3

5 bound in some real way to existing international agreements that promote and protect human rights and the environment if they are to be taken seriously. The system of trade negotiations should also be transparent, accountable and democratic and be developed within a timeframe that allows for social and environmental impact reviews to be incorporated into the negotiations process. A social contract (introduced, discussed and implemented) is an essential element of any economic policymaking in Central America or elsewhere. Necessary Conditions for Trade As has been mentioned already, a litany of economists has found that there is very weak - if any - proven correlation between openness and growth. Economists agree that economic growth can greatly assist the alleviation of poverty in the long run, but economic growth does not necessarily follow from openness. Winters, McCullough, and McKay have found that while greater access to technology and intermediate goods, benefits of economies of scale and competition, and constraints on government inefficiency could result from trade, none of these are a guaranteed outcome of trade. 5 In East Asia, where growth has spiraled and poverty has been greatly reduced in the last decade, it is important to recognize that domestic investment policies were the most essential factor in kick-starting growth and were put into place long before trade was liberalized. 6 It is clear that other factors rather than openness must be present in order for a country to be successful in transitioning out of poverty. Rodriguez and Rodrick found that for trade to have a permanent positive effect, it must be combined with other policies, such as humancapital accumulation and conflict resolution. In another study, Rodrick found that the presence of healthy institutions is very important to economic growth and development. Studies by Taylor and Wacziarg both revealed that investment is an essential partner to trade, and that bad investment policies could greatly undermine trade benefits. 7 Birdsall emphasizes the importance of domestic (not just foreign) investment, in order to have protection from an unsteady and 4

6 abruptly changing foreign atmosphere. She also argues for explicit strategic interventions by government to plan sustainable economic growth. 8 Ades and Di Tella write that a low level of corruption is also necessary. 9 A study by Harrison demonstrates that society must have social safety nets in place if it is to mitigate the negative effects on the poor that result from trade liberalization. 10 The bottom line is that the success of trade depends greatly on the policies that accompany it. In Making Openness Work: The New Global Economy and the Developing Countries, Rodrick provides a succinct and clear summary of those complementary policies that must be in place if a country is to benefit from trade. First, a country must have a domestic investment strategy to kick-start growth, Rodrick writes. Domestic investment can greatly assist in spurring growth, as occurred in East Asia. Domestic investment increases the private returns to capital, he explains, which encourages entrepreneurship. South Korea, for example, increased its domestic investment rate from 10 percent to 30 percent of GDP from 1960 to the late 1970s. Because of this investment, domestic industries were greatly strengthened, forming a strong base upon which to build further growth and to compete in international trade. Like South Korea, Taiwan and Singapore also heavily subsidized private investment, and these types of domestic investment all served to spur growth in East Asia. Related to domestic investment is the accumulation of technology as well as human and physical capital, which can help spur growth for obvious reasons. (It is important to note, however, that while domestic investment and accumulation of technology and capital may contribute to growth statistics in terms of national GDP, specific policies are necessary for guaranteeing that equitable income distribution and social well-being result.) Next, Rodrick explains that the ability to maintain macroeconomic stability is needed in order for trade liberalization to be successful. Social and political institutions must be strong enough to absorb and adjust to shocks, unstable conditions, conflict, and other types of change. 5

7 Countries might lack these institutions for a variety of reasons, but one telling sign of inability to adjust macro-economically is the presence of deep social, regional, ethnic, or economic cleavages. Countries with deep cleavages have historically had a very difficult time adjusting to macroeconomic change change which could come about when a newly liberalized country becomes exposed to new challenges and international conditions in the world market. 11 Strong institutions are essential in dealing with instability and change. Institutions are needed, Rodrick writes, that allow a high degree of political participation and the practice of civil and political liberties. Also necessary are high-quality bureaucracies and a functioning judicial system, or the rule of law. Social insurance or social safety nets are necessary as well in bridging the cleavages to allow strength in the midst of macroeconomic instability. Adequate human resources with the necessary skills must be present to run and manage these institutions. It is also important to note that a growing body of experts is questioning the wisdom of the laissez faire liberalization policies that have typically been promoted in the 1990s. Ha-Joon Chang likens the current liberalization prescription for developing countries to kicking away the ladder, or withholding the options most essential to their development. Certain mechanisms, such as tariff protections, subsidies, or institutions, are needed to socialize the risk of investment in these infant industries, he writes. Yet, the domestic support policies for infant industries that were used by the now-developed countries to jump start their own economies are not considered good policies for currently developing countries. 12 Chang is concerned that as developing countries freedom to pursue those support policies formerly used by the U.S. and other now-developed countries decreases, their options for growth also diminish. Even though developing countries are working to improve their institutions, the free trade demands placed on them by developed countries have caused growth rates to slow in the past two decades. Chang points out that the per capita growth rate for developing countries has actually fallen from 3 percent in to 1.5 percent in

8 for most developing countries. 13 Therefore, it may be helpful to add to our critique of the DR- CAFTA. consideration of to what degree the party countries will be allowed the freedom to develop and implement national priorities using tools such as tariffs, subsidies and domestic regulations that they feel can best aid their growth and development. Application to Central America and the Dominican Republic Are domestic investment, accumulation of technology and of human and physical capital, the ability to maintain macroeconomic stability, and strong institutions with political participation and liberties, as well as maintenance of the rule of law and social safety nets, present in Central America-DR? Domestic Investment and Tariff Reduction Tariff reduction and premature opening up together with low domestic investment and low savings rates have caused Latin America s growth rates in the 1990s (post liberalization) to be much less than was achieved during the pre-liberalization days of dirigiste policies, when Latin America exercised much more control and regulation over domestic policies. Ajit Singh shows that, since the implementation of the Washington Consensus policies in Latin America, low domestic investment has characterized the region. Further, he argues that the result of liberalizing in response to the Washington Consensus, when investment was very low because of the debt crisis, is that Latin American industry is now competitively weak. 14 One example of the reversal of the dirigiste policies is that while Central American-DR tariff levels are still generally higher than those in the U.S., they have dropped dramatically since 1990, when the international financial institutions began to pressure them to unilaterally reduce tariffs. In the last decade, the average tariff in Nicaragua (considered the poorest country in the region) fell from 43.2% to 5%. 15 Even tariffs for sensitive products have generally been reduced. Guatemala, for example, has zero tariffs on beans, and white corn has a maximum 7

9 tariff of 20 percent. 16 The Congressional Research Service reports that from 1995 to 1999, the average applied tariff for agricultural products from Central and South America averaged between 11% and 17%. 17 Central America-DR is seen by the U.S. as an underdeveloped region 18 that can be a market for increased U.S. exports, but which the USTR is clear will not threaten the U.S. with many new imports. 19 This is because the historically successful experience of strong and consistent domestic investment in export production through incentives and other means, has been abandoned in most of Central America-DR as a result of those countries adherence to the Washington Consensus recommendations. Nicaragua, for example, for the sake of liberalization, has gone as far as abandoning the instruments with which it was seeking (successfully) to promote non-traditional exports, an article by the UNDP suggests. 20 Accumulation of technology and human and physical capital Nor does Latin America appear to excel in the accumulation of technology or human and physical capital. The types of products being produced and exported within these countries do not indicate that technology and capital are thriving. The U.S. imports $13.2 billion in goods from Central America-DR, with the leading goods being apparel products and edible fruits. 21 Agriculture, which is both consumed domestically and exported, is the industry that provides jobs for a huge number of people in Central America-DR, especially those in rural areas. Table 1 illustrates that most countries in the region are characterized by a high percentage of workers in the agricultural sector. 8

10 Table 1: Agriculture in Central America and the Dominican Republic Country Agricultural Sector, % of GDP % Labor Force Employed in Agriculture % Exports to the U.S. that are Agricultural Main export crops Nicaragua 32.6% 42% 84% coffee, corn, rice, bananas, sugarcane, cotton, tobacco, sesame, soya, beans; beef, veal, pork, poultry, dairy products Guatemala 22.6% 50% 56.1% coffee, sugarcane, bananas, fruits and vegetables, cardamom, corn, beans, cattle, sheep, pigs, chickens Honduras 13.7% 34% 46% coffee, bananas, shrimp, lobster, meat, other fruits and vegetables. El Salvador 9.5% 30% 11.5% coffee, sugar, corn, rice, beans, oilseed, cotton, sorghum, shrimp, beef, dairy products Costa Rica 9.1% 20% 11% Bananas, coffee, sugar, pineapples Dom. Republic 10.7% 17%? sugarcane, coffee, cotton, cocoa, tobacco, rice, beans, potatoes, corn, bananas; cattle, pigs, dairy products, beef, eggs Source: CIA Fact Book, 2004 Instead of producing more technological and capital-intensive goods, Central America- DR imports these from the U.S. and other developed countries. In 2003, Central America-DR imported $32 billion in textiles, machinery, electrical machinery and equipment, and plastics from the U.S. ($11 billion of goods were bought by Central America and the rest by the DR). 22 Clearly, Central America-DR needs more investment in physical capital and technology. In 2001, more than half of U.S. foreign direct investment (FDI) was in Costa Rica, with that country much more successful than any of the others in attracting high technology investment and firms. 23 Investment in human capital such as education, training, and health has been limited in Central America. In 2003, the UN Development Programme reported that governments in 9

11 Central America spent only $187 per capita on social spending in , a level that is only 10.7% of regional GDP and is very low, within the Latin American context. 24 The result of this low investment in human capital is reflected in the social indicators for the region. In 2003, the World Food Program estimated that 8.6 million or one in four people in the region are hungry. 25 Table 2 below shows some other chilling statistics for the region. Guatemalans have a life expectancy of only 66 years and the highest infant mortality (40 per 1,000 live births), child malnutrition (24 percent), and illiteracy rates (a striking 30 percent). For each of these indicators, one or more of the other four countries do not lag far behind. In fact, five of the countries are among the lowest performers in Latin America and the Caribbean on the human development index: the Dominican Republic ranks 98 th ; El Salvador, 103 rd ; Honduras, 115 th ; Nicaragua, 118 th ; and Guatemala, 121 st. 26 Table 2 - Central American Countries and the Dominican Republic: Key Development Indicators, 2002 Country Life expectancy at birth (years) Infant mortality rate (per 1,000 live births) Child malnutrition (% of children under 5) Illiteracy (% of population age 15+) Human Development Index Costa Rica Dominican Republic El Salvador Honduras Nicaragua Guatemala Latin America and Carribbean Sources: This chart is from: Stoffs, K. Larry, Central America and the Dominican Republic in the Context of the Free Trade Agreement (DR-CAFTA) with the United States, CRS Report for Congress, L32322, Nov. 12, It uses information from the Human Development Index from UNDP s Human Development Report 2004; all other data from World Bank s Country at a Glance reports, generally showing 2002 or most recent estimates. 10

12 Because of high unemployment, a large unskilled population, and the countries inability to respond adequately to the recurring natural disasters, immigration rates out of the countries continue to increase every year. In 2000, Central Americans were 34.5% of the foreign-born population in the U.S, or 9.8 million. In 2002, this number had increased to 11.8 million (36.4% of the 2002 foreign born population), and by the end of 2003, to 12.4 million (36.9%). 27 The ability to maintain macroeconomic stability The region-wide economic crisis in 2002 shows the region s vulnerability to external economic conditions. Costa Rica was best prepared to deal with the crisis and depended on its eco-tourism industry and diversified exports while waiting for the crisis to subside. But the other countries experienced a serious drop in exports, which decreased by 2.5% or $282 million, and this impacted their economies. GDP just barely kept up with population growth, and per capita income actually fell in Honduras, Guatemala and Nicaragua, while it rose just slightly in Costa Rica and El Salvador. Norman Girvan, the Secretary General of the Association of Caribbean States, reports that this is because of changing terms of trade, with the price of exports relative to that of imports falling since 1995 in all of the countries (Costa Rica: by 6.5%; El Salvador by 20.8%; Guatemala by 18.2%; Honduras by 1.2%; and Nicaragua by 29.5%). Some of this is due to the rapid decrease of coffee prices because of international competition, Girvan says, and he believes that it was the high remittances from those living abroad that helped the countries get through the situation. Such vulnerability to international conditions, unfavorable economic terms, and dependence on remittances from other countries (with many of these remittances coming from immigrants who have only temporary protected status in the U.S.), is certainly not a plus for the economic stability of the region. 28 Another example of economic instability in the region was the bank crisis in the Dominican Republic, which had been one of the fastest growing economies in the region in the 1990s because of tourism and trade, with an average growth rate of 6.5%. Then, in May of 11

13 2003, a bank crisis caused the country s second largest bank to collapse, with two others following. More than 400,000 depositors, including small business and individuals, were affected. This bank crisis, along with slowed global tourism and other regional problems, combined to make the weak economy crumble. This led to political unrest, effectively terminating the presidency of Hipolito Mejia. 29 El Salvador s erratic growth is also worrisome when judging how effectively the region can deal with macroeconomic stability. This country was one of the quickest to agree to international pressure for liberalization and unilaterally reduced many trade barriers in the 1990s. This has also made El Salvador one of the most vulnerable to international fluctuations. While Salvadoran policy has remained fairly constant in recent years, its growth rates have not been so constant. After high growth in the 1990s, it stagnated at the turn of the century and has been unresponsive even to the $500 million of new FDI attracted in the last several years. 30 In the 1990s, Central America s average GDP growth rate was less than its population growth - only 1.6%. The rapid decline in coffee prices and slower global growth made the situation worse. 31 Singh writes of enormous fluctuations that have occurred in Latin America s stock markets recently that are unrelated to any changes in the fundamentals. 32 Domestic savings rates are very low in Latin America less than 20% in almost all countries in the region which many economists fear will not fare well for steady, long-term development and growth. 33 The Central American economies have also been extremely vulnerable to the natural disasters that, in recent years, have characterized the region. In 1998, Hurricane Mitch left 7,000 dead in Honduras and caused $2 billion in damage there, and killed between 1,800 and 2,400 in Nicaragua and around 250 in El Salvador. 34 Two earthquakes in El Salvador in 1998 killed 2,000, injured 8,000 and left 1.5 million homeless. In the Dominican Republic, floods in May 2004 killed 900 and left 15,000 homeless. Nicaragua has recently experienced several natural disasters. The Central American countries have historically had great difficulty in dealing with these natural disasters and other crises, including domestic conflict and the 12

14 economic crises mentioned above. Likewise, it is unclear whether Central America-DR yet has the skills to weather the macroeconomic instability that will result from free trade. 35 Cleavages Guatemala, Nicaragua, and El Salvador are still recovering from drawn out conflicts whose origins were closely linked to prevailing social and economic conditions, including inequity in the distribution of land, lack of democratic processes, and vast inequality in levels of wealth and income, and in which serious human rights abuses were perpetuated by brutal police and military regimes. 36 While each country has become more democratic, the immense inequality continues to persist. The Gini coefficient for the region is a striking.55, which makes it a region with one of the higher levels of income inequality in the world. 37 Guatemala, which has been ranked by the World Bank s poverty assessment as one of the most unequal countries in the world, provides one example of a country with deep cleavages caused by poverty and inequity. Indigenous persons make up half the country s population, hold only 25% of the country s wealth and experience a poverty rate of 76% versus a 41% poverty rate in the non-indigenous population. In El Salvador, inequality greatly increased as neoliberalism was implemented. Poverty actually rose from 47% to 51% during the 16 years of governance by neoliberalist leaders. Currently, 48% of the country lives in poverty and 25% live abroad in search of work. 38 In the Dominican Republic, Costa Rica, and El Salvador, there has been significant public reaction against the liberalization of state-owned services, which opponents of liberalization argue the government is responsible for providing cheaply. With privatization, many have stated that the government is acting without regard for the nation s best interests and is perpetuating the burden of poverty and inequity. Protests became common in the Dominican Republic after the government agreed to privatize electricity, resulting in increased power bills and continued blackouts. In El Salvador, doctors and others took to the streets 13

15 when the government set plans to privatize health. Costa Rica, pressured to privatize telecommunications and insurance as part of DR-CAFTA, faced public unrest as well. 39 Institutional Strength Although the Central American-DR countries have worked to rebuild institutions after years of war, the institutions are still somewhat weak and unstable. The recent U.S. Congressional Research Service (CRS) report on the DR-CAFTA countries called Guatemala s institutions fragile after years of war, Nicaragua s institutions weak, and El Salvador s judicial system corrupt. 40 In particular, Nicaragua s poverty has led to an inability to reform many institutions, including the justice system, which remains largely politicized and ineffective, according to USAID. Reforms regarding rule of law, business and investor confidence, and governance all remain very slow. 41 Weak institutions have an impact on the region s ability to provide adequate social safety nets. In August of 2003, the World Bank finished an evaluation of the first generation of social safety nets. It found that Central America s limited social insurance programs are not well targeted on the poorest at-risk groups or not administered efficiently and are reaching only a small percentage of the poor. While the countries spend, on average, 5% of GDP on direct social protection, the report notes the difficulty of designing and implementing the necessary programs, the huge gap between available fiscal resources and social needs, and the natural disasters that continually reverse whatever advances may have been achieved. In all, the World Bank report summarizes, the social safety nets have been generally inadequate. 42 Assistance from the U.S. towards social development is also lacking and is not adequately assisting the development of effective institutions, provision of services for the poor, or long-term development. USAID does have programs in the five poorest countries, but while the U.S. has been generous in times of natural disaster and poured money in for its own interventionist purposes and controversial contra support during Central America s civil wars, 14

16 aid for untied development assistance wanes. Michael Conroy, formerly from the Ford Foundation s Office on Mexico and Central America, then reported, The attention that Central America received during the civil- military strife of the 1980s, though mixed in intent and impact, has now been replaced by concerted international neglect that has produced a quieter, more subtle isolation and threatened economic strangulation of the region. He went on to say that what is most lacking in the region is international support to aid the leaders of the Central American countries in their goals of sustainable development and peace during the post-war period. 43 Without strong domestic investment or institutions, and with noticeable cleavages and instability in the face of macroeconomic change, it appears that liberalization will worsen, not strengthen, existing problems in Central America-DR. Corruption and Human Rights Institutions have a long way to go in providing an area for political dissent. While the situation in Central America-DR has greatly improved since human rights-abusing military generals became notorious during the region s civil wars, political liberties are still suppressed. The Dominican Republic still has a very poor human rights record, according to the Congressional Research Service report mentioned above, with extrajudicial killings in 2003 estimated at between 150 and 292. The CRS also reports that concerns about human rights abuses in Guatemala have actually been on the rise in recent years, after declining greatly postcivil war. Nicaragua has improved substantially, but 20 extrajudicial killings by members of the security forces have recently been reported, as well as allegations of torture and mistreatment of detainees by police. 44 The suppression of unions is a problem in many, if not most, of the countries in the region. In Nicaragua, union activities spark such severe reprisals that there has only been one strike recognized by the government since Honduras does have significant union activity, 15

17 but it is undermined by high levels of blacklisting. Guatemala refuses to recognize a union unless one half plus one workers in an industry have joined it, a rule which acts as a significant obstacle to union recognition. El Salvador has not yet signed the ILO conventions that protect trade union rights; as a result, only 5% of El Salvador s labor force is unionized. Labor laws in this country are weak and nearly unenforceable because of a corrupt judicial system. The Dominican Republic is also known for weak enforcement of labor laws. 45 Institutional corruption is also a serious problem in Central America-DR. Transparency International recently reported that corruption is very high in Central America-DR. Transparency International s Corruption Perception Index ranks levels of corruption in 145 countries. Rankings closer to one indicate a low level of perceived corruption whereas rankings closer to 145 indicate a high level of perceived corruption. The Central American-DR rankings were: Costa Rica (41 st ),El Salvador (51 st ) Dominican Republic (87 th ), Nicaragua (97 th ), Honduras (114 th ), and Guatemala (122 nd ). 46 El Salvador s judicial system and labor rights enforcement are particularly corrupt. The last president in the Dominican Republic was also notorious for corruption. Even in Costa Rica, current president Abel Pacheco won the presidency on an anticorruption platform, but has since faced corruption charges of his own. 47 It should be stated that corruption within institutions is not simply a problem specific to the Central American countries. The U.S. has had its own problems at the national level with corruption. ii In the region, the U.S. has also participated in the ugly history of supporting the dirty wars in Central America in the 1980 s. This bilateral support has fueled corruption and violence in the region and also created confusion as to the role of the U.S. in the region. Corruption is a complicated subject which cannot be reviewed solely within a national context but with an overall understanding of systems at play. ii The U.S. national elections in 2000 underwent international scrutiny due to insufficient voting structures and poor media reporting. In addition, corporate scandals such as Enron and Arthur Anderson are examples of private contracts supported by the U.S. government which have destabilized regulation in key sectors and therefore public control. 16

18 DR-CAFTA and the pre-conditions for growth and development in Central America-DR In order for true, equitable development to occur in Central America-DR, social factors must be addressed in the DR-CAFTA. Unfortunately, many of the real social concerns have been ignored in negotiations leading up to the trade agreement. Poverty, labor and environmental problems, and gender have been ignored at the expense of greater economic freedom for international investors and business interests, culminating in restrictions on domestic regulation and investment. Twenty-two chapters and four annexes describe in detail the rules and regulations governing the final version of the DR-CAFTA, which reduces trade barriers between the parties of the agreement. In addition to rules outlining the timetable and details of this elimination, the agreement also includes rules on investment, intellectual property, service sectors, labor and environmental standards, and other areas. 48 The following section will detail some important areas of the DR-CAFTA agreement. Agriculture Tariff elimination in agriculture was a major issue in the negotiations because it touches such crucial issues as food security and rural livelihoods and communities. The agriculture sector provides employment for many people in Central America and often represents a large share of GDP and exports (see Table 1 on page 9). Additionally, the generous subsidies provided to U.S. producers remain quite controversial with many critics charging that they are trade distorting. Because of great concern in Central America-DR about the sensitive agricultural sector, the Federation of Central American Agricultural Producers pushed for separate negotiations concerning agriculture, but the request was not conceded. Instead, the countries created a list of sensitive agricultural products they wished to exclude from the agreement (for example, the Nicaraguan Agricultural Cooperative Federation lobbied to exclude white corn, red and black beans, rice and dairy products). In the end, deadlines were extended to 15 or 20 years for some 17

19 sensitive products, but with the caveat of a new rule written into Chapter 19 that the Free Trade Commission, the DR-CAFTA s administrator, can speed up tariff elimination if needed. 49 The official CAFTA text instructs that all countries involved will completely phase out tariffs and quotas on all goods (except for four agricultural and food products) on six levels: immediately, 5 years, 10 years, 12 years, 15 years, and more than 15 years. Four exceptions are made: Costa Rica will be permitted to maintain a tariff on fresh potatoes and fresh onions; the other four countries will be allowed to maintain tariffs on white corn (the most sensitive product in the CAFTA countries a staple crop produced by subsistence farmers and used to make tortillas) and the U.S. will be permitted to protect sugar. For the four products, there will be an agreed-upon quota that will be imported duty-free, and that quota will increase about 2% each year up to a certain import cap. If more of a product is imported than allowed by the quota, an over-quota tariff will be applied to the over-quota imports. Tariff-rate quotas and over-quota tariffs will also be applied to other sensitive products that were awarded a phase-out period of greater than 10 years. Other mechanisms to protect sensitive products include: long tariff and quota phase-out periods, nonlinear tariff reductions (where most of the tariff reduction occurs in the latter years of the reduction period), and import safeguard mechanisms (which are restrictive measures that come into effect if imports suddenly surge or prices fall below certain levels). 50 Textiles and apparel will face zero tariffs, provided that they meet the rules of origin, meaning that some apparel produced in the CAFTA countries will be duty-free if it contains certain fabrics from Mexico or Canada or from other countries in special cases. 51 Under the Caribbean Basin Trade Partnership Act (passed in 1990 to extend the benefits of the 1983 Caribbean Basin Initiative) 52, 74% of Central American-DR goods currently enter the U.S. duty-free, 53 including all of Central American consumer and industrial products that have duty-free access to U.S. markets, while about 50% of agricultural goods have dutyfree access. 54 However, the U.S. does use quotas and other restrictive mechanisms as means 18

20 of protection. For example, the U.S. still has over 100 percent tariffs on over-quota sugar or peanut imports. 55 As found by Chang and other economists mentioned above, either tariff protections, subsidies, or institutions for socialization of risk must be in place in order to promote growth. Developing countries normally do not have access to funds for subsidies and see tariffs and quota adjustments as the most cost-effective means of protection from foreign competition. Unfortunately, the DR-CAFTA does not allow the proper safeguards for use by Central America- DR. While four products are exempted from tariff reductions and other products will be liberalized according to timetables that suit each country, it is doubtful that the DR-CAFTA countries would ever be able to become competitive with U.S. producers or eliminate the need for tariffs and other protections in this limited time period. There are also no provisions mitigating the impact of such changes on those in poverty, who are likely to be severely impacted. In addition, many products for which the Central America-DR countries sought concessions were not awarded such transition periods. One such product was rice, which is one of three staple foods in the region. Rice In Central America-DR, 75% of the 80,000 rice producers are small-scale and generally lack access to irrigation, technology, or credit, according to Oxfam International. Rice production is especially concentrated in poor areas, such as Guatemala s Polochic Valley and Nicaragua s Autonomous Region of the North (RAAN). With the U.S. farm program having allocated $ billion in total agricultural supports in 2003 for U.S. farmers (an amount higher than the GDP of most CA countries), and U.S. rice producers receiving $1.279 billion in subsidies that year (greater than Nicaragua s entire national budget for 2004), there is concern that CA farmers will not be able to compete with U.S.-subsidized rice when Central American-DR tariffs are eliminated. U.S. subsidies for rice are, in fact, greater than the value of rice itself. In 2002, the value of U.S. rice produced was 19

21 only $844 million compared to over $1 billion in subsidies, and this has led to dumping. Paddy (whole grain, before cleansing or processing) rice was exported to CA in 2003 at percent lower than the cost of production. In DR-CAFTA, the parties have agreed to an year time frame for complete rice sector liberalization, but with initial duty-free import quotas of 352,320 tons of paddy rice and 54,650 tons of milled rice, or one quarter of regional consumption. Oxfam estimates that the increasing quotas will lead to a 20 percent drop in the price of rice, in addition to a drop in U.S. rice prices that is expected from 2005 to Although the tariffs are allowed to be reduced gradually, many Central American farmers are concerned about possible devastating effects because of a past experience in Honduras which is now called arrozazo, or rice scandal. In 1991, Honduras reduced its tariff levels on rice imports because of a drought and a resulting scarcity of rice. In just a few months, the amount of rice that came into the country was more than annual consumption and this was devastating to Honduran rice producers when new harvests arrived. The effects continued to be devastating at the new, reduced tariff levels. Rice production was reduced by 86 percent in ten years, with the number of rice producers falling from 25,000 to 2,000 because they could not compete with the influx of rice. (Over 30,000 tons of milled rice and 11,000 tons of paddy rice were imported from the U.S. in a few months.) Prices decreased 28 percent in one year, resulting in a 35 percent decrease in rice cultivation in Thousands of rice growing families were driven out of business. From 1995 to 1997, there was another increase in rice imports and thousands more producers were forced out of business. As a result, Honduras became dependent on international rice and international price fluctuations. Honduran rice imports from the U.S. had risen from $1 million in 1991 to $20.1 million in While there are individuals in all of the Central American-DR countries who are worried about the DR-CAFTA s impact on domestic rice production, Nicaraguans are especially concerned. Rice production there is extremely polarized, with large producers able to access credit, irrigation, and technology, while the 6,000 small, indigenous growers, who make up 34% 20

22 of rice producers, do not have the same advantage. The DR-CAFTA will gradually reduce Nicaragua s current tariffs of 45% and 62% on paddy rice and milled rice until they are fully eliminated. High quotas will allow 92,700 tons of paddy rice and 143,650 tons of milled rice to enter Nicaragua duty free in the first year of the agreement. Many Nicaraguan rice producers are fearful because while the cost of rice production in the U.S. versus Nicaragua is $9.05/100 lbs (without transport costs) versus $8.14/100 lbs., the average price of paddy rice exports from the U.S. to Nicaragua is $7.32/100 lbs. With this type of advantage to domestically subsidized U.S. rice producers, the Nicaraguan growers are particularly concerned about what impact this will have on their livelihoods. Unfortunately, Nicaraguan politics are influenced by a small group of rice importer special interests, and the 1.8 percent of government financing for agriculture that went to the rice sector was primarily awarded to the larger, wealthier, producers. 57 Sugar Sugar is another area in which reduced tariffs and increased quotas will likely be detrimental to the well-being of the poor in the Central American-DR countries. The Institute for Agriculture and Trade Policy (IATP) reports that, unlike other major U.S.commodity programs, the U.S. sugar program utilizes a system of quotas on imports and on domestic production to avoid surplus production, instead of the direct government payments used for other commodities that result in overproduction and dumping. This controlled supply causes U.S. sugar prices to remain high (23 cents per pound in the U.S. versus 11 cents per pound worldwide), providing an important market for many developing country exporters of sugar to the U.S. The IATP is concerned that elimination of the sugar quotas (over a 15-year period) required by the DR-CAFTA will cause U.S. sugar prices to fall, which would likely lead to dumping at low prices in developing countries such as Central America-DR. In order for developing country producers to remain competitive, IATP predicts that the governments of those countries will be faced with the challenge of providing unaffordable support to failing domestic producers

23 It is true that in the above situations or others in which a domestic industry is experiencing damage, a country may apply to temporarily adapt trade measures. Chapter 8 of the DR-CAFTA text provides that, in a situation where a party country is experiencing serious injury or threat of serious injury to a domestic industry, a safeguard measure (such as maintaining higher tariffs or reducing a quota) could be applied. However, safeguard measures are only allowed to be applied during the transition period for tariff reduction. 59 A country could use a safeguard to remedy damage caused by a tariff reduction, but then be forced to reimplement the tariff reduction once the reduction period has passed, making the safeguard clause ineffective at preventing long-term damage. There is clearly reason for concern about reducing tariffs and increasing quotas for the many sensitive agricultural sectors in the Central American-DR countries and about increased opportunities for dumping by U.S. industries. Without domestic institutions available to help Central American-DR farmers weather the impact of these changes and without the funds to provide counter-subsidies against U.S. domestic supports, how will Central American-DR agricultural producers the majority of which are small farmers survive? U.S. Agricultural Subsidies U.S. subsidies have already been referenced previously, but they deserve special mention as trade distorting mechanisms by the U.S. that seriously interfere with Central America-DR s ability to compete in the international market. The U.S. provides internal support and export subsidies for agricultural goods such as dairy products, poultry, sugar, pork cattle, basic grains, oils, oil-bearing seeds, and vegetables. 60 It should be noted that a certain level of subsidies can be necessary to make up for the losses farmers might otherwise experience in producing certain goods. However, high levels of 22

24 subsidies can become trade distorting and lead to dumping in poor countries. In 2003, the U.S. farm program allocated $ billion in total agricultural supports for U.S. agribusinesses. This amount is higher than the GDP of most CA countries. Oxfam International reported recently that the U.S. and Europe have spent $248 billion in subsidies, price supports, export credits, and other spending protecting Western farmers from the free market for agricultural goods. 61 Means for Central America-DR to deal with these subsidies is a topic that is notably missing in the DR-CAFTA text. U.S. subsidies are problematic because they both limit Central American countries abilities to sell their products abroad and they allow U.S. companies to sell at very cheap prices outside the U.S. It was already mentioned above how U.S. subsidies provide U.S. rice producers with the ability to sell below the cost of production. The same has been true of corn, which, in 2001, was exported from the U.S. at an average of 33 percent below the cost of production and transportation. Considering subsidies to U.S. producers for rice, corn, sugar, and other products, the Foundation for Rural Social and Economic Development in Nicaragua has estimated that the livelihoods for 200,000 Nicaraguan farmers will be destroyed by imports from the U.S. 62 Throughout negotiations, the USTR repeated its assertion that agricultural subsidies would only be discussed within the context of the WTO, not in bilateral or regional agreements. Since the Central America-DR region is a small trading partner, it was never expected that the U.S. would decide to eliminate its subsidies in the platform of CAFTA. However, U.S. subsidies still pose a difficult competition problem for Central American farmers and there are not any equalizing measures to level this unfair advantage in the DR-CAFTA text. 23

25 Intellectual Property Rights Medicines The intellectual property rights provisions in the DR-CAFTA are often called TRIPSplus because they carry an additional requirement above and beyond the IPR rules in the WTO Trade-Related Aspects of Intellectual Property Rights (TRIPS), which require 20-year patent protection on pharmaceutical drugs. TRIPS language in both the WTO and DR-CAFTA rules allow the safeguard of compulsory licensing, in which a government can authorize a third party to use a patent held by another party in a special situation, such as a health emergency for which cheaper, generic drugs need to be issued for public health. Sometimes, just the threat of compulsory licensing can cause the price of the patented drug to be lowered. For example, when Brazil threatened to issue compulsory licenses for AIDS drugs, pharmaceuticals responded by significantly reducing prices. 63 The intellectual property rights chapter in the DR-CAFTA, however, creates a new data exclusivity rule, in which a patent-holding company s safety and efficacy data will be kept secret for 5 years, so that any company that wants to reproduce generically must re-invent all of the safety and efficacy tests that were completed previously by the first company. Test data, based on animal and human testing, can sometimes cost tens of millions of dollars, so generic manufacturers normally simply prove chemical and bio equivalency to the patented drug and are then able to be approved for distribution. Having to re-test would effectively prevent generic manufacturers from being able to sell the drugs cheaply or greatly delay their entry into the market. 64 The data exclusivity rules could also render compulsory licensing ineffective. Currently, a country that is experiencing a health crisis or another emergency situation can authorize generic reproduction of a drug under the compulsory licensing provisions of WTO trade rules. This provision allows a government to authorize reproduction of a drug by a third party (a government agency, a company, or someone else) using a patent held by someone else. The 24

26 third party would produce the drug generically, while paying a modest royalty to the patentholder. However, with data exclusivity, the third parties will not have access to the data needed to reproduce the drugs, and this will prevent generics from being created. 65 The increasing prevalence of HIV/AIDS in Central America-DR makes concerns about IP rules and access to generic drugs more immediate. USAID reports that HIV/AIDS is a serious problem in Central America, with conservative estimates of more than 175,000 infected individuals (and another 150,000 in the Dominican Republic), most of whom are unaware of their condition. HIV/AIDS is especially increasing for women and for mother to child transmission. In Honduras, AIDS is the leading cause of death for women of reproductive age. USAID states, The region s future economic development is threatened since the costs of AIDS-related morbidity and mortality tax both human and financial resources. HIV/AIDS is most likely to affect labor productivity, medical costs, the orphan population, and the size of the labor force. 66 Furthermore, of the more than 300,000 people in the Central American-DR countries who are infected with HIV/AIDS, 35,000 of those infected require antiretroviral treatment, but only 6,000 currently receive it. In 2003, governments and pharmaceuticals negotiated a 55 percent reduction in ARV prices, but the reduced cost is still almost equivalent to the per capita incomes in Guatemala, El Salvador, and the Dominican Republic, and almost twice as much the average income of people in Nicaragua and Honduras. It is estimated that generic ARVs could reduce the price by 75 percent. The looming question is: will the stricter IP rules in the DR- CAFTA prevent or slow down much needed treatment and drugs? Without special provisions in the IPR section of the DR-CAFTA text, there is reason for concern that this could occur. Another potential problem is that the intellectual property provisions in the DR-CAFTA include the patenting of all life forms. Transnational corporations that control seed patents may limit indigenous farmers ability to have access to traditional seeds and medicines which are central to their livelihoods, nutrition and cultural history. Traditional or indigenous knowledge, 25

27 such as medicines, crafts, and seeds, are also threatened. Those who bring in their income through craft making (traditionally women) and sale may face large corporations which want to patent their craft design. 67 Seeds CAFTA is the first trade agreement to require that parties ratify the Union for the Protection of New Varieties of Plants convention of 1991 (UPOV 1991), the revised 1978 UPOV, so that farmers will be restricted from saving and replanting certain types of seed. Plant breeders will also be allowed to take legal measures against those who do replant. 68 Under the agreement, corporations can patent seeds for which local farmers are charged fees for use. Farmers also may be required to sign technology agreements against the saving of patented seeds. For many small farmers in Central America-DR who are used to using the same seeds every year, these new rules will cause increased production costs for already struggling producers. The producers may also see additional costs for fertilizers and pesticides that the patented seeds might require. They also fear that GMO corporations will be able to sue those areas in which GMO seeds are replanted or force domestic governments to regulate use. If seed types and varieties are limited, this will also increase crop exposure to insects and disease. Farmers also fear that, as occurred in Mexico under NAFTA, pollen from genetically modified organisms (GMOs) could contaminate conventional crops. 69 Privatization of Services Article 11.8 on Domestic Regulation in the DR-CAFTA text dictates that domestic regulation must be 1) no more burdensome than necessary to ensure the quality of the service, and 2) not a restriction on the supply of a service. Market Access rules specify that countries 26

28 cannot limit the number of private service suppliers or service operations or the total number of services. As a condition for signing the DR-CAFTA, the USTR insisted on the privatization of some sectors in the partner countries that are currently controlled by the governments of those countries. While El Salvador, Nicaragua and the Dominican Republic have already privatized a large number of services, the governments of the other countries, especially Costa Rica, still run many services. Costa Rican negotiators found themselves under pressure to privatize the telecommunication sector during the negotiations and finally agreed to do so, despite major public protests. Then, two days before the CAFTA talks were scheduled to end, the U.S. proposed that Costa Rica s public insurance monopoly must be opened to U.S. insurance companies and private competition. The Costa Rican negotiators walked out of the talks, but two weeks later (Jan. 25, 2004), they agreed to phase-in U.S. private insurer competition, in exchange for minimal improvements in access to the U.S. agricultural market. 70 The DR-CAFTA text utilizes a negative list approach, in which rules allowing increased competition and eliminating government monopolies apply to all services in a country unless specifically exempted in the text of the agreement. For most countries, health care, water supply and sanitation, education and energy were automatically subject to the DR-CAFTA market access rules, which state that a government cannot impose restrictions on private competitors. 71 Parties were only allowed to add to the list of desired exclusions until March 25, 2004, after which no more services could be added unless agreed upon by all members. Additionally, no changes could be made after that date to rules governing some sectors, such as computer services, construction, energy services, professional services, land transportation, audiovisual, telecommunications, urgent delivery services, and others. 72 The privatization of sectors that fill basic needs of poor populaces, such as the energy water, telephone, health, or social services, is worrisome. Tables 3, 4 and 5 on pages 28 and 29 27

29 show the comparative residential costs for water, electricity and telephone in the five Central American Countries. Comparable statistics were not available for the Dominican Republic. Table 3: Central America - Basic Fee for Residential Consumption of Potable Water (per cubic meter) U.S. Dollar s Source: Secretaria de Integracion Economica Centroamerica, Centroamerica Precios de Combustibles, Salarios Minimos y Tarifas de Servicios Publicos. August 2002, Privatization can potentially make service provision cheaper and more efficient because of competition. However, if the service is heavily subsidized by the government, as is the case for water services in Guatemala, El Salvador, Honduaras and Costa Rica, 73 then privatization of the service would likely mean that consumers could pay the full cost of the service which could mean a sharp rise in costs for the poor if other safety nets are not developed. At the same time, private companies may assume monopoly status and end up increasing the prices paid by the public or ceasing to expand service to the poorest, most inaccessible and least profitable regions. Any increases in price for essential services is particularly threatening given that the average daily minimum wage in these countries is quite low: Guatemala - US$3.01; El Salvador US$4.32; Honduras US$2.79; Nicaragua US$2.04; Costa Rica US$9.67, and Dominican Republic US$ However many Central Americans work in the informal sector (Guatemala 60%, El Salvador 55%, Honduras 69%, Nicaragua 65%, Costa Rica 42%, and Dominican Republic 55%) 75 where earnings are even lower. 28

30 Table 4: Central America - Rates in Force for Electricity (per KW) U.S. Dollars Source: Secretaria de Integracion Economica Centroamerica, Centroamerica Precios de Combustibles, Salarios Minimos y Tarifas de Servicios Publicos. August 2002, Table 5: Central America - Rates for Local Telephone Calls (per minute) U.S. Dollars Source: Secretaria de Integracion Economica Centroamerica, Centroamerica Precios de Combustibles, Salarios Minimos y Tarifas de Servicios Publicos. August 2002, 29