Front Matter

Front Matter

Author(s):
Erik Offerdal, and Robert Rennhack
Published Date:
August 2004
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    © International Monetary Fund 2004

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    Library of Congress Cataloging-in-Publication Data

    The macroeconomy of Central America / edited by Robert Rennhack and Erik Offerdal.

    p. cm.

    1-4039-3652-8 (cloth)

    Papers from a conference held by the Central American Monetary Council and the Western Hemisphere Department of the IMF from July 25–26, 2002, in Antigua, Guatemala.

    ISBN 1-4039-3652-8 (cloth)

    1. Central America – Economic policy – Congresses. 2. Fiscal policy – Central America – Congresses. 3. Taxation – Central America Congresses. 4. Central America – Appropriations and expenditures – Congresses. 5. Central America – Commercial policy – Congresses. 6. Monetary policy – Central America – Congresses. I. Rennhack, Robert. II. Offerdal, Erik. III. Consejo Monetario Centroamericano. IV. International Monetary Fund. Western Hemisphere Dept.

    HC141.M25 2004

    339.5W28—dc22

    2004045623

    10 9 8 7 6 5 4 3 2 1

    13 12 11 10 09 08 07 06 05 04

    Printed and bound in Great Britain by

    Antony Rowe Ltd, Chippenham and Eastbourne

    Contents

    List of Tables, Figures, and Boxes

    Foreword

    The countries of Central America have a long tradition of regional cooperation, with the oldest system of regional integration in Latin America. These ties have been growing closer each year, as trade among the countries expands and banks engage in more cross-border lending within the region. A free trade agreement between the United States and Central America would most likely integrate the region further.

    Against this background, the Central American Monetary Council and the Western Hemisphere Department of the IMF sponsored a conference on 25–26 July 2002 in Antigua Guatemala to strengthen the regional dialogue on the key macroeconomic policy issues facing the region. Participants included the ministers of finance, presidents of central banks and bank superintendents from most countries in the region, as well as staff from the IMF, the World Bank and the Inter-American Development Bank. This occasional paper presents most of the papers that were prepared to provide background for the policy discussions among the participants in the conference.

    The conference opened by discussing how to set fiscal policy to keep public debt on a sustainable path, while allowing for effective programs to improve education and health and social safety nets. Chapter 1 sets the stage for this discussion by assessing the outlook for public debt in the region, highlighting the risks arising from several factors including external shocks and natural disasters. This chapter also reviews the debate on the usefulness of fiscal policy rules. Chapter 2 analyzes the trends in public expenditure in the region. In particular this chapter notes that public education on spending in Central America remains well below the average for Latin America. The level of spending on health appears adequate, but steps could be taken to improve the efficiency of this spending. Also the region would benefit from better targeting of social safety nets. Chapter 3 compares tax policy in Central America to other developing countries and confirms that tax revenues in the region are low by Latin American standards. It stresses that tax policy reform in the region should continue to emphasize the importance of strengthening domestic tax systems by relying on a wide range of taxes and taking steps to broaden the tax bases.

    The conference then, focused on how to strengthen the competitiveness of exports through further trade liberalization and the proper choice of the exchange rate regime. Chapter 4 points out that the region reduced import tariffs considerably between the mid-1980s and the late 1990s, and identifies several issues to be considered in the negotiations on a free trade agreement with the United States and in the Doha round of trade negotiations. It also suggests that monetary integration with the United States might be the next step once the region enters into a free trade agreement with the United States. Chapter 5 analyzes the variety of exchange rate regimes in the region, which ranges from full dollarization to managed floats, and concludes that the countries’ choice of regime is consistent with the choices made by developing countries in other parts of the world.

    The conference also covered the issue of financial supervision. Chapter 6 analyzes the trend of growing dollarization in the financial systems in many countries of the region and proposes steps to adapt prudential regulations to guard against the risks of partial dollarization.

    The main conclusions of the conference were:

    • Many countries in the region would benefit from stronger fiscal policies to keep public debt on a sustainable path, although there was no agreement on the value of fiscal rules.

    • Countries should seek to strengthen public investment in basic infrastructure and primary health care and education, which would most likely require raising tax revenues through better enforcement, simpler taxes and broader tax bases.

    • Implementing effective consolidated financial supervision is crucial, because a number of banking conglomerates in Central America are expanding their cross-border operations.

    • Partial dollarization — if it is present — creates a need for higher bank liquidity requirements and general provisioning requirements, as well as for strong macroeconomic policies.

    • Most countries seem to have adopted exchange regimes that make sense based on the structure of their economies.

    • It is important to provide thorough and clear explanations of policy proposals to legislatures and to the public to help build broad support for sound economic policies.

    Finally, the editors would like to thank all the participants in the conference for their time and energy and Mr Miguel Chorro of the Central American Council for his invaluable help in organizing the conference. We would like to give special thanks to Ms Lita Ali and Ms Hilda Scioville for their untiring dedication to organize all aspects of the conference, which made it a success.

    Robert Rennhack

    Division Chief

    International Monetary Fund

    Notes on Contributors

    Ana Corbacho Ana Corbacho is an economist in the Fiscal Affairs Department of the International Monetary Fund, and has work experience in Latin America, Eastern Europe, and Asia. Previously, she was a researcher for the Central Bank of Argentina, and for the Harvard Institute for International Development. She holds a BA in economics (summa cum laude) from Universidad de San Andrés in Buenos Aires, and a PhD in economics from Columbia University in the city of New York. Her dissertation on ‘Education, Income Distribution and Growth’ was awarded a distinction from Columbia University. She was a fellow of the Bradley Foundation, the Organization of American States, and the Public Policy Consortium at Columbia University.

    Hamid R. Davoodi Hamid R. Davoodi is currently a senior economist in the Middle East and Central Asia Department of the International Monetary Fund. He joined the IMF in 1997 and has worked previously at the World Bank, Federal Reserve Bank of San Francisco and taught at Georgetown University in Washington DC. He has published papers in economic journals the areas of governance, poverty, economic growth, and fiscal policy.

    Alain Ize Alain Ize is currently an advisor in the Monetary and Financial Systems Department (MFD) of the IMF. Prior to joining MFD, he worked in the Fiscal Affairs Department, also of the IMF. Prior to joining the IMF, he was a professor at El Colegio de Mexico and an economist at Banco de Mexico.

    Daniel Lederman Daniel Lederman is Senior Economist in the World Bank’s Office of the Chief Economist (LCRCE) of the Latin America and Caribbean region. Before joining the Bank, Mr Lederman was an economist with the United Nations’ Economic Commission for Latin America and the Caribbean (ECLAC). Mr Lederman received a BA degree from Yale University (1989), where he studied economics and political science. Mr Lederman then went on to receive his MA (1991) and PhD (2001) degree in international economics and politics from the Johns Hopkins University, School of Advanced International Studies (SAIS). Mr Lederman has written extensively on issues related to financial crises in emerging markets, violent crime, the political economy of economic reforms, institutional reforms, economic growth, and international trade.

    Valerie Mercer-Blackman She is an economist at the Western Hemisphere Department, International Monetary Fund (IMF). Since 1996 she has worked on fiscal and macroeconomic issues of Central American and Transition economies. Prior to that she was at the Council of Economic Advisors during the Clinton Administration. She holds a PhD in Economics from the University of Pennsylvania and a BA from Yale University.

    Erik Offerdal Erik Offerdal, a Norwegian national, has a masters degree in economics from the University of Oslo, Norway. His early career, while working for the Norwegian government and as a Visiting Scholar at Harvard University, focused on general equilibrium modeling, the macroeconomic impact of petroleum revenues, and tax policy analysis. He joined the International Monetary Fund in 1990, and has since been engaged in macroeconomic surveillance and policy formulation in Eastern Europe, Asia, and Latin America. He was the Fund’s resident representative in Vietnam 1997–99 and is currently the resident representative in Guatemala.

    Guillermo Perry Guillermo Perry has been Chief Economist of the Latin America and Caribbean Region at the World Bank since 1996, where he is responsible for leading the Bank’s position on economic policy issues in the dialogue with regional authorities and for designing, together with the Vice President, the Bank’s strategy for lending and advisory services in Latin America. Prior to joining the World Bank, Mr Perry served in several senior policy-making positions in his native country, Colombia, including that of Minister of Finance and Public Credit, Minister of Mining and Energy; and Director of the General Directorate of National Taxes. He was also Director of two of Colombia’s leading economic think-tanks, and has served as a member of the Constitutional Assembly and of the Senate of the Republic. Mr Perry undertook doctoral studies in Economics and Operational Research at the Massachusetts Institute of Technology between 1968 and 1970. He has published several books (including, most recently, Closing the Gap in Education and Technology (2002), co-authored with David de Ferranti et al.) and numerous articles on a range of subjects covering macroeconomics, fiscal policy, financial policy, international finance, and energy policy issues.

    Robert Rennhack Robert Rennhack is currently Division Chief for Colombia, Ecuador and Belize in the Western Hemisphere Department of the Fund. At the time of the regional conference on Central America, he was chief of the Central American Division. He has worked extensively on macroeconomic issues in Latin America for the past 20 years, and has written papers on capital mobility, monetary policy, and energy demand. He holds an undergraduate degree from the University of Michigan and a graduate degree in economics from Yale University.

    Janet Stotsky This was written while she was a deputy division chief in the Tax Policy Division of the Fiscal Affairs Department of the International Monetary Fund. She has also been in the Western Hemisphere Department. Prior to joining the Fund, she was an assistant professor of economics at Rutgers University and a financial economist with the Office of Tax Policy in the United States Department of the Treasury. She has a BA degree with high honors from Princeton University and a PhD from Stanford University in economics and has published in the areas of public finance and tax policy, and was a contributor to the IMF’s Tax Policy Handbook.

    Rodrigo De J. Suescún Melo Rodrigo Suescún is Senior Economist in the World Bank’s Office of the Chief Economist (LCRCE) of the Latin America and the Caribbean region. Before joining the Bank he worked at the Center for Studies on Economic Development (CEDE) of the University of the Andes, where he was also Professor of macroeconomics in the graduate school. He was Director of the Financial and Monetary Affairs Department at the Banco de la República, Colombia’s central bank, and Senior Economist in its research department. Mr Suescún received a BA degree from Universidad de los Andes, Bogotá, where he studied economics. He holds MA and PhD degrees in economics from the University of Pennsylvania.

    Asegedech WoldeMariam Asegedech WoldeMariam is a Senior Research Officer in the Tax Policy Division of the Fiscal Affairs Department of the International Monetary Fund (IMF). She has also worked in the IMF’s African Department. She previously worked as a Consultant for a non-profit consulting firm in Washington DC — PPF International. She has a BA Degree in Business (International Finance) and an MA in Economics from Syracuse University. She has co-authored and published working papers on tax policy and public finance issues and was a contributor to the IMF’s Tax Policy Handbook.

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