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18 April 2019

Unlocking the economic potential of Central America and the CaribbeanApril 2019 | Article

By Andres Cadena, Julio Giraut, Nicolas Grosman, and Andre de Oliveira Vaz


Over the past 15 years,1 the economies in Central America and the Caribbean (CAC) recorded an average annual GDP growth of around 4 percent, higher than the growth rates achieved by the Latin American average and most developed economies, but well below most other developing regions; regions such as South Asia and sub-Saharan Africa—and countries such as China or India—exhibited average annual growth of more than 5 percent during this period.

However, growth has not been sustained by all CAC countries. In fact, only three countries (Costa Rica, the Dominican Republic, and Panama) have grown above the regional average over the last 30 years, and only the former two exhibited higher than average growth rates in both analyzed periods. Indeed, most nations have presented high volatility in economic growth since 1987 (Exhibit 1).


Exhibit 1
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Section 1
Factors that drive the dynamism of Central America and the Caribbean

What has enabled the CAC region to have achieved faster growth than the rest of the Latin American countries? One of the distinctive factors has been rapid productivity growth: in the last 15 years, productivity has grown at more than 2 percent per year, representing more than half (56 percent) of the growth of the region’s GDP—substantially above the average for Latin America, but still lagging far behind global champions such as Asia’s booming economies.

In addition, the relative macroeconomic stability of CAC countries reflects sound monetary and public-finance policies (Exhibit 2).

Exhibit 2
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There’s also a clear trend among CAC countries to develop an increasingly service-focused economy. The importance of the services sector in the region is widely recognized by institutions such as the Development Bank of Latin America, Economic Commission for Latin America and the Caribbean, Inter-American Development Bank, and Organisation for Economic Cooperation and Development.2 Although this approach has shown good results, most countries across the region have shown a premature drop in their levels of industrialization. The dynamics of industrial growth have recently changed due to the automation of processes, significantly reducing the labor intensity of typical manufacturing occupations—however, it remains an important lever of growth in several high-growth developing economies.

Growth in CAC has also been driven by high levels of investment and household consumption when compared with the rest of Latin America and the global average. Household consumption is partly explained by the high value of remittances received in a majority of CAC countries: except for Costa Rica, Panama, and Trinidad and Tobago, remittances represent on average 11 percent of GDP, compared with the global average of less than 1 percent. On the other hand, a high trade-balance deficit remains a main factor of lag, both regionally and in the fastest-growing countries.

Section 2
Four growth archetypes

We classified the CAC countries into four archetypes, according to their current income level and economic growth over the last 30 years: stars, emerging, falling behind, and laggards (Exhibit 3).
Exhibit 3
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What have been the key success factors of the ‘star’ countries?

Countries classified as “stars” have benefited from a rapid increase in productivity, high levels of investment, and a model of growth focused on service sectors:
Productivity represented more than 60 percent of GDP growth since 2002 (versus 18 percent in other CAC countries), growing at more than 3 percent per year.
In 2017, investment represented 30 percent of GDP, registering an annual growth of more than 7 percent between 2002 and 2017.
The average annual growth achieved by the service sector was more than 5 percent over the past 15 years, representing nearly two-thirds of the economy—allowing star countries to avoid the effects of falling commodity prices and overall volatility.

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