Project: Rule Of Law The World Bank: Hope For The Future Of Central America

Thursday, January 1, 2004 - 01:00

The Editor interviews Jane Armitage, Director of The World Bank's programs in Central America.

Editor: Can you provide our readers with something of your background and experience?

I have a degree in economics from Cambridge University and a Ph.D from M.I.T., where I specialized in development economics. After graduate school, I spent a couple of years doing field work in Brazil. I was very attracted to the World Bank because of its mission, which is to reduce poverty. Working at the Bank provides the opportunity to apply economic theory and development experience in a very practical way to improve the lives of poor people. It is a very stimulating, multicultural and multi-disciplinary working environment, with people from all over the world and with a variety of professional backgrounds.

Editor: Can you tell us about the steps that led to your appointment as head of the Bank's programs in Central America?

Over a period of many years I had gained practical experience in a wide range of sectors: agriculture, education, labor markets, pensions, public sector management and so on. At one point I was fortunate to work in the Office of the President, which gave me an excellent overview of the World Bank's strategic directions. For a time I was also the Bank's Director of External Affairs, which gave me a good opportunity to listen to the concerns of a broad range of external constituents and to understand better the global political environment in which the Bank operates. My appointment as Director of the Bank's operations in Central America is thus the culmination of many years of experience.

As Director for Central America, I lead the World Bank's assistance to Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama. This involves working with clients, other development agencies and our teams of specialists to develop an integrated and holistic strategy to promote growth and reduce poverty. Given that financial and human resources are limited in both Central America and the World Bank, while the challenges and needs in these countries are very great, a key element is the ability to set priorities and make difficult choices about how and where Bank resources are to be used. We develop a country assistance strategy for each of the six countries which lays out how the Bank proposes to work in partnership with that country for a three- or four-year period. That strategy is then taken to the Bank's governing board for approval. Once approved, we know how much money is available to support the country's programs.

Editor: Among the variety of issues that the Bank deals with in Central America, what are the principal ones that must be met and overcome if the region is to overcome poverty?

A major issue for Central America for the last few years has been the lack of sustained economic growth, which is essential to reduce poverty. At the World Bank, however, we believe that it is not just the rate of growth that is important for poverty reduction, but also the pattern of growth. A broad-based and inclusive growth strategy creates employment or income-generating opportunities for the entire population, and particularly for the poorest groups. A number of developing countries have had growth that has been narrowly driven by, for example, the exploitation of oil or minerals, or by a high-tech or export processing enclave of some sort. This is not the kind of growth that reduces poverty.

Based on the Bank's experience from around the world, there are a number of elements which are critical for sustainable growth and poverty reduction in Central America. These include macroeconomic stability, a healthy financial sector and investments in human capital and in infrastructure. Improvements in governance and the rule of law are also critically important, including a more professional civil service, efficient public financial management and procurement systems, reduction of corruption and an independent, efficient, accessible and transparent judicial system. Finally, to attract investors and ensure a vibrant and productive private sector which generates employment and income, countries must provide a sound investment climate by increasing competition through an open trade policy, providing a level playing field for investors, strengthening property rights and contract enforcement, and reducing the administrative barriers to doing business.

Sound macroeconomic management is a basic prerequisite for any economy to grow in a sustainable way and thereby reduce poverty. Together with the International Monetary Fund, our sister organization, we try to help governments develop a set of sound macroeconomic policies. Fiscal sustainability is a major challenge for all countries in Central America. To cite just one aspect of this, tax revenue in some countries in Central America is below 11 percent of the Gross National Product, which is inadequate. In the United States, federal taxes alone are about 15 percent of GDP. In many countries tax collection is low due to widespread evasion, compounded by inefficient and antiquated administrative systems. Many people simply do not pay their taxes. And there is the perennial problem of corruption within the public sector, which, of course, further encourages tax avoidance.

There is also the question of waste. A tremendous amount of foreign aid comes into several countries in Central America, but it often does not have the impact that it should. Corruption is part of the problem: some aid simply disappears before it reaches the people for whom it is intended. But there is also duplication, inefficiency, poor targeting and a lack of focus on quality and results.

In Central America the poorest and most disadvantaged groups live predominately in rural areas and include indigenous groups and Afro-descendants who have historically faced discrimination, exploitation and exclusion. A key element in an inclusive growth strategy is to ensure that public expenditures benefit the poor by giving them access to basic services, such as primary education, health care, clean water and sanitation. Such access does not ensure their productive participation in the economy, but it is a start.

Editor: Are you speaking of the region as a whole, or are there differences from country to country?

Of course, there are significant differences from country to country. Costa Rica is a model for the entire developing world in terms of what it has achieved in poverty reduction, social indicators and environmental management. Guatemala, Honduras and Nicaragua, on the other hand, have a very long way to go in achieving the Millennium Development Goals adopted in September of 2000 by the member states of the United Nations. The Millennium Declaration, which announces a global partnership for development, commits the international community to an expanded vision of development and social and economic progress in all countries. Costa Rica, with its fifty years of democracy and stable government and the rule of law, together with its relatively low inequality and large investment in human development, is well on track to meet or exceed the goals set by the Declaration. On the other hand, poverty is higher in Guatemala than in any other country in Central America, despite its middle income status. Guatemala is a country with very grave social and economic inequalities, a result of its colonial past and the access - or lack of access, really - of its indigenous people to land, education and justice.

Clearly, however, the countries of Central America have a great deal in common. Sadly, all of them are vulnerable to natural disasters - hurricanes, droughts, earthquakes and volcanic eruptions - and to swings in the prices of key commodities, notably coffee and bananas. They are all highly open economies, for whom the United States is the main trade partner, and thus their economic fortunes are closely linked to the state of the United States economy. In this context, we are hopeful that the Central America Free Trade Agreement, CAFTA, will help promote enhanced growth and poverty reduction throughout Central America.

Editor: You mentioned CAFTA. Can you tell our readers something about that?

The countries of Central America are almost finished with negotiations on a free trade agreement with the United States. We see CAFTA as an excellent opportunity for Central America because growth and employment generation cannot come from the local market alone, given the small size of these countries. The successful conclusion of the negotiations would consolidate access to the United States market for both exports and imports and should significantly improve the region's prospects for attraction of new investment, economic diversification and further expansion of trade. However, key challenges include how to cushion the potential impact on a few sensitive protected activities (mainly traditional agricultural products) and how to ensure the benefits of the treaty spillover to all segments of the population.

Editor: Are there things that the NAFTA experience tells us ought to be avoided in CAFTA?

We know from the NAFTA experience that it is not just access to a large market that makes for a breakthrough. In Mexico certain sub-regions of the country, those with a well-educated workforce and good infrastructure, have been quick to seize the opportunities that NAFTA offered, while poorer regions in Mexico have been left behind. We are very conscious of what is necessary for Central America to take advantage of CAFTA.

Another lesson is that the actual negative impact on the United States economy is minimal, contrary to dire warnings about possible lost jobs. After all, the economies of the countries of Central America all together amount to less than half of one percent of the economy of the United States. On the other hand, the impact on a small economy can be large. There are, in addition, sensitive areas, particularly with respect to agriculture, where the Central American economies are going to require some degree of protection for a time. In the CAFTA negotiations the goal is to have the transition spread out for a period of up to fifteen years, following the NAFTA example.

Editor: Looking at Central America as a whole, where are we today compared to ten or fifteen years ago?

The most important thing to recall is that ten or fifteen years ago much of Central America was in a state of civil war, declared or otherwise. Nicaragua, El Salvador and Guatemala are only recently emerging from years of terrible internal conflict. Over the last few years, it appears that the rule of law, the implementation of democratic processes and the peaceful transition of power, constitute reality as opposed to a distant aspiration. This represents a very great step forward.

Editor: What about the future? Are you optimistic about accomplishing the tasks that remain?

I am optimistic about the future. The elected governments of the nations of Central America are more forward-looking and reform-minded than they have been for years. They are, in addition, very focused on increasing their growth rates by becoming more competitive. They are aware of what must be done to increase growth and reduce poverty. And, I believe, they are committed to the necessary measures: sound macroeconomic management, institutional reform (including anti-corruption measures, judicial reform and improving the climate for business) and investment in infrastructure and the social sectors. While much depends on the domestic policies of the individual countries, the successful implementation of CAFTA and an upturn of the American economy can also play a major role in enhancing the prospects of the region. I would only add that the Bank's website contains a wealth of information on its Central America programs, and I would refer your readers to