One Step Forward for Central America: The Plan for the Alliance for Prosperity

˙ Voces

Recognizing the magnitude of emigration from the region, El Salvador, Guatemala and Honduras introduced a development strategy known as the Plan for the Alliance for Prosperity.  The A4P, which received funding from the United States, was crafted with help from the Inter-American Development Bank. It consists of four components: reinvigorating the productive sector, investing in human capital, addressing citizen security and strengthening state institutions.

 

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Northern Triangle Meeting with Vice President Joe Biden in January 2016

The plan presents an important opportunity, not only to address the root causes of migration in the region, but also to engage regional leaders in a discussion of development needs and priorities. That said, the plan is incomplete, and more needs to be done to invest in human capital, link development to migration, and target the informal economy. The plan is an essential stepping stone to prioritize the region, and thus is an effort that deserves to be strengthened and not to repeat past mistakes.  For example, the continued focus on tackling insecurity signals that security and antinarcotics are prioritized over development. 

 

Does the Plan meet the region’s needs?

As a strategy, the Alliance for Prosperity (A4P) cannot nor should not be easily dismissed. In reading over the strategy document, and in analyzing the level of commitment, including the number of projects that the governments have already agreed to, it is clear that the strategy represents a feat of intellectual engineering. 

The key question is whether the Plan’s four components and geographic focus can mitigate the current level of migration. In this sense, it can be said that the Plan is incomplete. While it presents a great opportunity to move Central America towards a more stable path for growth and security, the strategy could be made more sustainable through greater investment in human capital as well as stronger linkages to migration itself.

At this point, migration from the region is substantial. Each year, an estimated 200,000 people try to leave the region, of which roughly 120,000 manage to cross the border into the United States. Another 100,000 are deported back to the region each year. This is to say, each year a group of people equivalent to nearly half of the increase in the labor force tries to emigrate, a truly massive scale migration. These figures, moreover, do not include child and youth migrants leaving the region, which amounted to more than 100,000 in 2015 alone.

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In addition to the sheer volume of these flows, it is important to understand the reasons that people are leaving. According to people currently living in the region, the two primary reasons that they would choose to emigrate are the lack of opportunities and the violence that has taken over their communities.  

Table2.3.14.2016

Given these realities, questions emerge as to whether the Plan meets the region’s needs. The Plan is incomplete in four areas.

Insufficient Economic Opportunities

First, the proposed strategies dealing with investments in economic growth in agro and tourism industries can hardly create the opportunities that people need to remain in their countries. To put it differently, those who are emigrating are primarily from lower-middle income groups, with annual incomes typically less than US$3,000. Considering the case of El Salvador and its income distribution, could an investment strategy focused on the agro and tourism industries, which typically generate salaries below $250/month, really mitigate migration? People say that they are leaving not for lack of employment, but because their salaries are not high enough to live on. In the current context, a person within this salary range ($250/month) considers his or her cost of living (typically around $400/month for an individual) and the opportunity to migrate and earn nearly 10 times more money, plus be able to send remittances home to support family members.  Moreover, not all the people migrating are living and working in agriculture.

Table3.3.14.2016

On the other hand, the increased investment in agro-industry or tourism, which generate salaries below $300/month, raises the question of whether these are viable options for generating better opportunities. Given the magnitude of this migration, can the proposed strategy really retain these potential migrants, an estimated 200,000 people per year?

Failing to Link Migration to Development

Second, within the current macroeconomic context, Central American economies are split between two poles of growth and wealth generation, with a third ‘missing middle.’ First, the growth in the region has been driven by its dependence on the global economy, specifically on merchandise exports (predominantly agriculture and “maquilas”) and tourism (much of which comes from the diaspora itself). In terms of merchandise exports, less than 20 products account for more than 60% of exports by 50 top companies, which in turn employ only a fraction of the total labor force.[3]

The second pole of growth is linked to migration. Remittances, nostalgic trade, diaspora tourism and other services represent nearly 20% of GDP, on average. Remittances alone amounted to $17 billion in 2015, or nearly 50% of income in some 3.5 million households in the region. Moreover, remittance recipient households have a total stock of savings of over US$ 3 billion, the majority in informal, “under the mattress” savings, according to research by the Inter-American Dialogue.

Failing to Tackle Informality

In the midst of these poles is a vast informal sector, comprised of more than two thirds of the labor force and the business sector together. It is euphemistic to talk about a private sector in Central America when the majority of these enterprises are one-person businesses that earn less than two minimum wages.

At the same time, addressing informality has proven to be difficult and largely unsuccessful: Central America has not managed to reduce the size of its informal sector in the past 40 years. It is a chronic problem that cannot be resolved as part of a single strategy.

In turn, low levels of income are the byproduct of this economic model based on agriculture or other low-performing products that rely on unskilled, uneducated and underpaid labor. This situation is accompanied by historical inequality, a legacy of the 19th century.

Table4.3.14.16

Additional Questions

It is not clear from the A4P what benchmarks or milestones will be used with any of the components. For example, shouldn’t goals be in relation to better quality of life similar to that of other countries in the region, taking into consideration which models have been most successful? Costa Rica is a prime example. The Costa Rican economy is between two and four times that of its neighbors, and can serve as a benchmark.

At the same time, a key question is whether the investment in the labor force and secondary-school retention will reduce youth migration or will create better conditions for the population. Many donors have already worked in education and training. However, an investment in human capital is much more than this, and implies linking the approach to the knowledge economy in a more integral manner. Again, what is the benchmark and the milestone? Currently, the problem with education is not only one of quantity, but rather one of quality. If it is true that only a little more than half of young people are completing secondary school, and less than 20% of the labor force is skilled and formally educated, the quality of knowledge that is being acquired is very rudimentary and poorly suited to the demands for a competitive labor force. In order for countries in the region to improve their growth rates, technical and academic training requires that a critical mass of the population educate and be educated in addition to the current figures. As such, it is important to introduce economies of scale in the knowledge sectors.

Third, the question of the geographic focus is key. The A4P theoretically takes a cross-cutting approach, focusing on communities that have been most affected by migration and violence. An analysis of the municipalities that have been selected, however, gives inconclusive results. In general, there is little correspondence between the communities that have been selected and the intensity of the problems, perhaps with the one exception of Honduras. In the three countries, human development levels of the communities selected are practically the same as the national average. Though Guatemala and Honduras prioritize communities of high youth emigration, in El Salvador the distribution is less clear. In this sense, the cross-cutting strategy does not necessarily respond to the realities of these communities.

Table5.3.14.16

Fourth, the security strategy continues on a well-worn path that has offered mixed results. Should insecurity be re-conceptualized, outside of the conventional framework? Why so much emphasis on security issues, when migrants say that they leave for a combination of security and economic issues?

The challenge of insecurity exists in the presence of an ecosystem of organized crime with very high opportunity costs. For example, extortion networks work on the basis of financial success, with profit margins of less than US$1,000 a month for each individual. However, that amounts to twice or three times more money than they would be earning in the “regular” economy. Drug trafficking rings, which have more sophisticated networks and hire hitmen and gangs for their operations, are generating at least US$700 million from drug trafficking. To address insecurity, it is important to think in economic terms, identifying mechanisms that make employment in crime more “expensive” and less lucrative. Could it be viable to explore the creation of an amnesty plan for organized crime networks, like those proposed during the democratic transitions for armed forces that participated in gross human rights violations? 

What else can be done? Advancing complementary solutions

The problem of migration is an economic one based on low productivity.[4] Therefore, it is important to expand the approach of the A4P to a focus on human capital rather than low value production. One method consists of investing in the labor force by addressing human capital, the informal economy, and innovation, while at the same time leveraging remittances for development.   

Strengthening human capital under the A4P

 

Human capital investment for children and youth 

It is important to create a comprehensive educational strategy aimed at improving quality, increasing enrollment, and expanding the number of youth who go on to college or vocational centers. Vocational centers in Central America are typically weak, with limited curricula and career opportunities. 

The human capital approach also needs to complement what is already taking place and being done by governments. This could include providing private support for after school education, expanding the quality and performance of vocational centers, and creating incentives for parents to invest in their children’s education. 

The commitment of governments under the A4P is in improving the quality of their education and keeping kids in school.  However, the volume of people migrating should also be part of the strategy.  In 2015, more than 40,000 minors, the vast majority of them secondary school students (or at least, around the age of secondary school students) and more than 140,000 adults crossed the U.S. border. 

In practical terms, El Salvador, Guatemala and Honduras have nearly 2 million kids in secondary education, more than 2% of whom are migrating every year.  Considering the fact that since 2010 the increase in pupils in secondary has been less than 1% for the three countries combined (in Honduras it has been negative), child migration is similar to adult migration, but in even more dramatic terms: the increase in annual enrollment in secondary is smaller than the increase of annual child migration entering the US.[5] 

Table 6.3.14.16

As a milestone, the A4P should aim at keeping kids in school and improving learning outcomes for at least 5% of secondary school kids. That is, reaching out to those who are underperforming and potentially migrating. The government, the private sector, and parents themselves also need to participate in this strategy.  After-school education ensures continuity of schooling as well as learning, whereas improved vocational centers will encourage parents to invest in their kids’ graduation and enrollment. 

Human capital investment for the labor force

The existing labor force lacks substantive skills to compete in the global economy.  To begin with, the vast majority are informal laborers or entrepreneurs working in saturated markets with limited competitive advantages.

Investment in the knowledge economy is central to expand the skills of the labor force in Central America. A knowledge-based economy is one formed around an ecosystem of well-formed and informed human capital, including knowledge, education, cognitive skills, innovation, and modern social norms. It draws on technological and social networks to create both tangible and intangible value.[6]  As such, the knowledge economy depends on the ability and capacity of people to learn and adapt new cognitive skills, techniques, values, and intellectual understanding as they respond to the demands of the global economy (portability, productivity and flexibility).

Festival para el Buen Vivir y Gobernando con la Gente in San Pedro Perulapán

The significance of the knowledge economy is threefold. First, it is the most important source of economic wealth, generating more value with less manpower through greater use of technology.  Second, it provides people with the necessary skills to adapt to a rapidly-changing and competitive global environment.[7] Third, life in the knowledge economy empowers human capital to further transform society by providing agency and decision-making opportunities to individuals.[8]

The strategic approach under the A4P should contribute to create a knowledge economy marketplace that satisfies the demands of the labor force. This marketplace includes knowledge entrepreneurs, such as teachers, trainers, advisors, and consultants in innovation and technology, among others. It also includes a financial component, with a financial marketplace to provide affordable credit to these entrepreneurs. Finally, it requires a state that facilitates investment in knowledge.  This marketplace could include sectoral intersections such as vocational centers operating through public-private partnerships servicing at least 2% of the existing labor force, or twice the number of people who attempt to migrate.

Innovation under the A4P

The current version of the A4P neglects innovation, which is a topic that is central to growth and development.  Innovation offers opportunities outside of the mainstream and the traditional model of growth. Because growth in the current context is precarious, it is essential to explore innovative approaches to productivity and equity in the region. 

The debate on innovation should consist of creating an agenda that defines economic and social inclusion policies over the long term and in relationship to the demands of the global economy.  Two key areas of practical debate in innovation relate to the implementation of modern agricultural technologies, from hydroponic to alternative energy use in agricultural landscapes, and low cost technology products.   On the latter, the region lacks full internet access, partly because many internet-based technologies are not affordable or the data user costs are expensive, and thus data consumption is low. Mobile technology poses a key development alternative to the region because it compiles a powerful financial value chain connecting consumers to a range of banking and non-financial intermediaries, whose access to credit would be central, and to producers in the local economy.

 

The missing link in the A4P: Migration and Development

Migration has generated an important stream of income, which as mentioned earlier, amounts to roughly 20% of the region’s GDP.  Yet, there are no development policies or strategies linked to the economic ties of migration.  One proposed approach is to tie migration and development through five unique and innovative components:

  • Financial education for remittance recipients,
  • Access to credit for small enterprises—especially those in the knowledge economy,
  • Promotion of diaspora-driven trade opportunities (the so-called “nostalgia trade”),
  • Diaspora funding of education using remittance platforms, and
  • After-school programs in areas of high emigration.

These strategies, though independent, share a common linkage with migration and remittances, and complement one another in terms of building assets. Financial education, and the financial inclusion it provides, is a relevant goal in itself because it formalizes millions of dollars in savings from thousands of remittance recipient households. In turn, the financial resources resulting from financial education, namely savings stocks, can be further leveraged in order to promote investment in the knowledge economy and in nostalgic trade. This leverage is done by mobilizing these savings for credit for knowledge entrepreneurs and nostalgia commodity producers. Diaspora demand for home-country products can be leveraged to help promote production of high-quality, specialized exports and can benefit from credit mobilized from the savings generated through financial education. Moreover, the diaspora philanthropy can be closely linked to educational services such as the after-school programs for youth in areas of high emigration. The objective is to have a critical mass of people mobilizing savings, investing in education, and contributing to human and economic development as each country transitions to a more knowledge-based economy.

Making investments in savings and education as a business strategy will lead to an expansion of opportunities to work and compete in the knowledge economy. 

This approach is fundamentally important because it addresses various strategic needs. First, it integrates migrant capital investment and savings from remittances into the financial sector, further mobilizing these resources for local development in education and skill formation.  Second, this strategy expands and complements—that is, does not replace—existing approaches to economic growth, and creates a new model for much-needed investments in services for the global economy. Making investments in savings and education as a business strategy will lead to an expansion of opportunities to work and compete in the knowledge economy. 

A national financial education campaign reaching to at least 30% of remittance recipient households can formalize savings of at least 200,000 households in the amount of US$100 million in deposits.  Those deposits can be leveraged for credit.  Moreover, engagement of diaspora organizations can generate donations from more than half million migrants to invest in education.  The extent of this impact will further strengthen the value of the A4P and close the circle of development and migration.

Another missing link in the A4P: tackling the informal economy

The A4P can make a stronger impact by addressing issues related to the informal economy.  As mentioned earlier, informality is the true missing middle in the region. And after many efforts, the size of the informal economy continues to very large.  The consensus among experts continues to point to the need to increase financial access (opportunities to open bank accounts, get credit and access to other financial tools) and reduce registration costs, which are both financial and bureaucratic.

The credit portfolio in Central America mainly finances large businesses, not small or microenterprises. In the case of Guatemala, for example, microfinance institutions in Guatemala lent to about 500,000 borrowers, with loans totaling more than $300 million, in 2011.[9] In Honduras, only 2% of total credits were disbursed for microcredit, while 17% – the same amount as that destined to personal consumption credit – goes to small creditors.[10]

Aside from financial access and improving registration costs, a major problem relates to the inefficiencies among unipersonal businesses earning incomes below two minimum wages.  Most of these are necessity-based enterprises that should instead be integrated into a larger business value chain in the form of salaried work, rather than keeping them as microenterprises. Transforming microenterprises into the labor force through larger business anchors is a central solution to reducing the size of the informal economy.  An increase in the credit portfolio to successful, profitable businesses will lead to an increase in hiring, particularly those in the informal economy.

Addressing informality as a development strategy is a matter of priority because it affects at least half of the labor force and enterprises, which currently show low earnings and for the most part do not pay taxes.

Include Nicaragua

Although the A4P focuses on the Northern Triangle, migration is not unique to these three countries.  More than 15,000 Nicaraguans migrate annually to neighboring Costa Rica to work and send money home.   

Nicaragua faces many of the same challenges associated with a low-performing productive sector, mostly focused on agriculture, more than 500,000 remittance recipient households and a large informal network. The sustainability of Nicaragua’s growth is suspect despite arguments of its increased rate, and it should not be overlooked in the A4P.

 

 

[1] See https://www.dhs.gov/sites/default/files/publications/CBP%20FY15%20Border%20Security%20Report_12-21_0.pdf

[2] http://www.cbp.gov/newsroom/stats/southwest-border-unaccompanied-children/fy-2016

[3] http://www.thedialogue.org/blogs/2016/02/a-new-strategic-approach-for-el-salvadors-economic-development-challenges/

[4] We don’t underestimate the magnitude of violence in the region and have demonstrated elsewhere that insecurity is one driver of migration.  However, insecurity is a byproduct of the opportunity cost crime offers to the average individual, which in turns makes crime  a “business opportunity” that is in fact more profitable than those in the formal sector.

[5] If the apprehensions of unaccompanied minors at the Mexican border are included, the number of children emigrating is higher than the annual enrollment increase.

[6] Hanushek, Eric, The Knowledge Capital of Nations: Education and the Economics of Growth, Cambridge: MIT, 2015.

[7] Atkinson, Robert and Stephen J. Ezell, Innovation Economics: the race for global advantage, New Haven, Yale University Press, 2012.

[8] Bauman, Zigmunt, On education: Conversations with Ricardo Mazzeo, Polity Press, 2012; Liquid Times: Living in an Age of Uncertainty, 2010.

[9] Mix Market 2014. 

[10] Central Bank of Honduras.