Central America : Global Integration and Regional Cooperation

Markus Rodlauer, and Alfred Schipke

• Publisher: INTERNATIONAL MONETARY FUND
• Year: 2005
• ISBN:
  9781589064461

NONE

Contents

Foreword

Preface

Abbreviations and Acronyms

I. Introduction and Overview Markus Rodlauer and Alfred Schipke

Background

Recent Developments

Overview

II. Macroeconomic Implications of CAFTA-DR M. Ayhan Kose, Alessandro Rebucci, and Alfred Schipke

Implications for Trade and Investment Flows

Implications for Economic Growth and Welfare

Could CAFTA-DR Help Reduce Poverty in the Region?

CAFTA-DR’s Potential Impact on Macroeconomic Volatility and the Co-Movement of Business Cycles

Conclusions

Appendix I. The Model

Appendix II. Volatility and Co-Movement of Macroeconomic Variables

References

III. Trade Liberalization and Tax Coordination Chiara Bronchi and Dale Chua

Structure and Trend of Tax Revenues in Central America

Estimating the Loss of Tax Revenue from CAFTA-DR

Dealing with the Revenue Impact of CAFTA-DR

CAFTA-DR and Issues of Tax Coordination

Conclusions

Appendix. Data and Methodology for the Calculation of Revenue Losses

References

IV. Fiscal Sustainability: A Value-at-Risk Approach Ricardo Adrogué

Analytical Issues and the Traditional Sustainability Approach

Modeling the Debt-to-GDP Ratio Using VaR

Assessment of Policy Options

Conclusions

Appendix. Value-at-Risk Methodology

References

V. Regional Integration and Exchange Rate Arrangements Jun Il Kim and Laura Papi

Issues Concerning Exchange Rate Regimes in Developing Countries

Current Exchange Rate Arrangements

Long-Run Options for Exchange Rate Regimes in Central America

Choosing Among the Long-Run Options: Key Factors

Choosing Among the Long-Run Options: An Index Approach

Conclusions

Appendix. Technical Appendix

References

VI. Regional Integration and Financial System Issues R. Armando Morales and Alfred Schipke

Financial Sector Development and Structure

Challenges for Financial Regulation and Monitoring

Recent Progress and Looking Forward

Conclusions

VII. Regional Issues in Macroeconomic Statistics Lorraine Ocampos

Data Suitability for Analytical Purposes

Moving Toward a Harmonized Statistical Framework

Technical Assistance to the Region

Conclusions

Appendix. Statistical Issues, Suitability of Data for Analytical Purposes, and Technical Assistance Missions

VIII. The Political Economy of Implementing Pro-Growth and Anti-Poverty Policy Strategies in Central America Luis Breuer and Arturo Cruz

Setting

Political Support for Pro-Growth and Anti-Poverty Strategies

Generating Consensus on a Long-Term Reform Strategy

Implications for the IMF

References

Boxes

1.1. Regional Economic Institutions

3.1. Revenue Effects of Growth Enhancement from CAFTA-DR

3.2. Current Status of Customs Administration in Central America

5.1. History of Exchange Rate Regimes in Central America

5.2. Regression Results

5.3. Projections for Indices of Central American Countries

6.1. Institutions Conducting Cross-Border Financial Transactions in Central America

6.2. Panama’s Financial System and Regional Offshore Center

6.3. Dominican Republic: Banking Crisis and Financial Reform

7.1. Main Data Issues in Central America

7.2. Dominican Republic: Data Issues

8.1. Institutional Aspects of Strategies to Boost Growth and Reduce Poverty

8.2. Consolidated Supervision of the Financial Sector

Tables

2.1. Tariffs in Central America, 1980–99

2.2. Selected Economic Indicators: Central America and Mexico, 2004

2.3. Growth of Exports and Imports

2.4. Top Eight U.S. Merchandise Imports from Central America, 2003

2.5. Top Eight U.S. Merchandise Exports to Central America, 2003

2.6. Diversification of Exports

2.7. Gross Foreign Direct Investment Flows

2.8. Foreign Direct Investment Inflows from the United States

2.9. Dynamics of Economic Growth

2.10. Contributions to GDP Growth

2.11. Potential Welfare Gains from International Risk Sharing

2.12. Forecast Variance Decomposition of GDP Growth

2.13. Forecast Variance Decomposition of GDP Growth (Regional Shocks)

2.A1. Volatility of Macroeconomic Aggregates

2.A2. Co-Movement of Macroeconomic Aggregates with U.S. Aggregates

3.1. Consolidated Central Government: Tax Structure for Selected Central American Countries, 2000–03

3.2. Central America: Average Collected Import Duty Rates

3.3. Customs Revenue on Imports from the United States, 2003

3.4. Schedule A Imports, 2003

3.5. Revenue Impact of CAFTA-DR, First Year

3.6. Honduras and Nicaragua: Revenue Impact of CAFTA-DR, First Year

3.7. Summary Table: Revenue Loss of CAFTA-DR

3.8. VAT Productivities

3.9. Excise Tax Summary

4.1. Results from Traditional Debt Sustainability Analysis

4.2. Main Vulnerability Measures

4.3. Projected Change in Primary Balance

4.4. Relative Contribution by Risk Factor

4.5. Effect of Increased Reliance on Domestic Currency Debt

5.1. Exchange Rate Regimes

5.2. Exchange Rate Regimes, Natural Classification

5.3. Trade Structure and Openness

5.4. Consolidated Claims of BIS Reporting Banks on Central American Countries

5.A1. Co-Movements in Output

5.A2. Source of Output Co-Movements

5.A3. Terms of Trade

5.A4. Co-Movements in the Terms of Trade

5.A5. Correlations of Terms of Trade

5.A6. Inflation Performance

5.A7. Co-Movements in Prices

5.A8. Optimum Currency Area Index: Regression Results

5.A9. Optimum Currency Area Indices for Central America and Europe vis-à-vis Anchor Country

5.A10. Central America: Projections for the Optimum Currency Area Indices vis-à-vis the United States

6.1. Central America: Structure and Performance of the Financial Sector, 1996–2003

6.2. Regional Banks, 2003

6.3. Prudential Requirements

6.4. Financial Sector Assessment Programs

7.A1. Statistical Issues

7.A2. Suitability of Data for Analytical Purposes

7.A3. Statistics Technical Assistance Missions, 1995–end-January 2005

8.1. Comparative Social Indicators

8.2. Comparative Governance Indicators

Figures

1.1. Central America: Real GDP Per Capita Growth

1.2. Poverty in Central America

2.1. Trade Openness

2.2. Trade with the United States

2.3. Exports to the United States

2.4. Imports from the United States

2.5. Growth Rate and Volatility of Macroeconomic Aggregates in Mexico and Central America

2.6. Impulse Responses of GDP

2.7. Co-Movement of Economic Variables in Mexico and the United States

2.8. Co-Movement of Economic Variables in CAFTA-DR Countries and the United States (Average Correlation)

2.9. Impulse Responses

2.A1. Production Structure of the CAFTA-DR Model

3.1. Tax Revenue, 1990–2003

3.2. Central America: Composition of Tax Revenue, 1990–2003

3.3. Composition of Tax Revenue, 1990–2003

3.4. Estimated Minimum VAT Rate to Compensate for Tariff Loss, 2003

4.1. Distribution of the Public Ratio of Debt to GDP in 2008

5.1. Nominal Exchange Rate Variability, 1984–2003

5.2. Optimum Currency Area Indices, 1984–2003

5.3. Comparison of OCA Indices vis-à-vis the United States, 1994–2003

5.4. Central America and Europe: Optimum Currency Area Indices

6.1. Central America: Public Debt, 1990–2003

6.2. Central America: Financial Sector Development

6.3. Banking Sector Dollarization, 2003

6.4. Organizational Structure of Cuscatlán

The following symbols have been used throughout this paper:

…to indicate that data are not available;

—to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;

–between years or months (e.g., 2003–04 or January–June) to indicate the years or months covered, including the beginning and ending years or months;

/ between years (e.g., 2003/04) to indicate a fiscal (financial) year.

“n.a.” means not applicable.

“Billion” means a thousand million.

Minor discrepancies between constituent figures and totals are due to rounding.

The term “country,” as used in this paper, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate and independent basis.

II Macroeconomic Implications of CAFTA-DR

M. Ayhan Kose, Alessandro Rebucci, and Alfred Schipke

Five Central American countries (Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua) and the United States signed the Central American Free Trade Agreement (CAFTA) in May 2004. The Dominican Republic (DR) joined the negotiations at the beginning of 2004 and signed the agreement (CAFTA-DR) in August 2004. The agreement will go into effect after the respective legislative bodies have ratified it.¹

CAFTA-DR negotiations were seen as a boost in regional cooperation because Central America negotiated as a region and most of the issues were addressed within a single framework. Schedules for market access, however, were negotiated bilaterally between the United States and the individual Central American countries. In many respects, the agreement is modeled on other bilateral free trade agreements the United States has recently signed, such as those with Chile and Singapore.² Though the Central American countries already have strong trade and investment relations with the United States and enjoy preferential access in the context of the Caribbean Basin Initiative (CBI), CAFTA-DR is substantially more comprehensive and changes the form of trade relations from the unilateral preferential arrangement defined under the CBI to a permanent bilateral agreement.³ For the Central American countries, the main expected benefits of the agreement are enhanced access to their largest export market, increased foreign direct investment, and institutional strengthening across a range of trade- and investment-related areas.

CAFTA-DR’s main objective is to eliminate all tariffs and substantially reduce nontariff barriers between the United States and the Central American countries.⁴ CAFTA-DR also includes a provision to foster trade flows between the Central American countries. During the past 10 years, the Central American countries have already significantly decreased tariffs for intraregional trade, and the common external tariff (CET) of the Central American Common Market is generally low and covers about 95 percent of imports to the region (Table 2.1).⁵ In addition, these countries have taken various steps to reduce the dispersion of tariffs. Immediately after CAFTA-DR enters into force, tariffs on all nonagricultural and nontextile exports from Central America to the United States, and tariffs on about 80 percent of nonagricultural and non-textile exports from the United States to Central America, will be reduced. Tariffs on other goods will be phased out incrementally over a 5- to 20-year period. Though a significant proportion of exports from the Central American countries have already had tariff-free access to the U.S. market under the CBI, CAFTA-DR would further reduce various restrictions and eliminate compliance costs necessary to qualify for preferential access (Griswold and Ikenson, 2004).

Table 2.1. Tariffs in Central America, 1980–99

(In percent)

Source: Inter-American Development Bank.

In the case of agriculture and textiles, CAFTA-DR provides some ...