- Alfred Schipke, and Dominique Desruelle
- Published Date:
- June 2007
© 2007 International Monetary Fund
Production: IMF Multimedia Services Division
Typesetting: Bob Lunsford
Figures: Bob Lunsford
Economic growth and integration in Central America / edited by Dominique Desruelle and Alfred Schipke — Washington, DC : International Monetary Fund, 2007.
- p. cm.—(Occasional paper; 257)
Includes bibliographical references.
1. Central America — Economic conditions. 2. Central America — Economic policy. 3. Debts, Public — Central America. I. Desruelle, Dominique. II. Schipke, Alfred 1959- III. Series: Occasional paper (International Monetary Fund); 257
HC141 .E266 2007
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- I Overview
- II Growth Performance
- III Pension Reform
- IV Assessing Sovereign Debt Structures
- V. Financial Sector Development: Public Debt Markets
- Hemant Shah
- Financial Sector in Central America
- Organization of Public Debt Management
- Dual Sovereign Issuers: Government and the Central Bank
- Primary Issuance of Public Debt
- Secondary Markets
- Investor Universe, and Regulation of Investments in Public Debt
- The Challenge of Creating a Regional Market
- Key Problems and Recommendations
- VI. Characterizing Monetary Policy
- 1.1. Central America: Real GDP Growth
- 1.2. Central America: Regional and Bilateral Free Trade Agreements
- 2.1. Central America: Long-Term Real GDP Growth by Country
- 2.2. Growth Accounting Across Regions, 1960–2003
- 2.3. Ranking of Ease of Doing Business
- 2.4. Cross-Country Growth Regressions
- 2.5. Fixed-Effects Panel Regressions
- 2.6. Scores of Institutional Quality
- 2.7. Estimated Impact on Growth of Improving Institutions
- 2A1. Actual and Predicted Growth, Cross-Sectional Regressions, 1995–2003
- 3.1. Main Characteristics of Mandatory Public Old Age Pension Systems
- 3.2. Defined-Benefit Systems: Average and Minimum Old Age Pensions
- 3.3. Defined-Benefit Systems: Balances and Reserves, 2004
- 3.4. Projected Population Aging
- 3.5. Defined-Benefit Systems: Real Internal Rates of Return on Contributions
- 3.6. Replacement Rates under Different Rates of Return in First-Pillar, Defined-Contribution Systems
- 3.7. Administrative Costs in Defined-Benefit Systems
- 4.1. Domestic Debt Share Determinants
- 4.2. Elasticity of Ratio of Debt to GDP vis-à-vis the Real Exchange Rate
- 4.3. Elasticity of the Sovereign’s Leverage Ratio vis-à-vis the Real Exchange Rate
- 4.4. Ratio of Short-Term Debt to Reserves
- 5.1. Structure of Financial System
- 5.2. Securities Issued by the Ministry of Finance and Central Bank
- 5.3. Auction Mechanisms for Public Debt Securities
- 5.4. Secondary Trading of Fixed-Income Domestic Securities
- 6.1. Breakdown of Index of Legal Central Bank Independence: Central America versus South America and Mexico
- 6.2. Taxonomy of Monetary Policy Strategies
- 6.3. Volatilities of Selected Macroeconomic Variables, 2000–05
- 6.4. Interest Rate Reaction Function of Central Banks, 1996–2005
- 6.5. Exchange Rate Crawl Reaction Function, 1996–2005
- 6.6. Central Banks’ Money Reaction Function, 1996–2005
- 6A.1. Main Provisions of Central Bank Legislation as of 2005
- 6A.2. Main Features of Monetary Policy
- 1.1. Central America: Selected Macroeconomic Indicators
- 2.1. Poverty Rates, Nationally Defined Poverty Line
- 2.2. Central America: Long-Term Real GDP Growth
- 2.3. Real Per Capita GDP by Country
- 2.4. Central America: Growth Accounting
- 2.5. Central America: Per Capita GDP and Total Factor Productivity
- 2.6. Real Per Capita GDP and Total Factor Productivity by Country
- 2.7. Central America: Real Per Capita GDP
- 2.8. Trade Openness: Total Exports Plus Imports
- 2.9. Exports to the United States
- 2.10. Comparison of Institutional Ratings
- 2A.1. Growth Accounting, by Country
- 3.1. Pension Coverage: Number of Contributors as a Share of the Labor Force, 2003
- 3.2. Contribution Rates for Mandatory Old Age, Disability, and Survivor Pensions
- 3.3. Standard Retirement Age and Life Expectancy at Age 60
- 4.1. Composition of Sovereign Debt
- 4.2. Structure of External Debt, 2001–05
- 4.3. Foreign Currency Debt
- 4.4. Short-Term Debt
- 4.5. Domestic Debt: Predicted and Actual
- 4.6a. Domestic Debt and Foreign Currency Debt Share
- 4.6b. Inflation History and Foreign Currency Debt
- 4.7. Short-Term Share and Total Debt
- 4.8. Sovereign Debt
- 4.9. Debt with Variable Interest Rate, 2005
- 4.10. Volatility of Revenue Growth, 1990–2005
- 5.1. Domestic Central Bank Debt/Domestic Government Debt, 2005
- 5.2. Potential Debt Auctions Per Year
- 5.3. Actual Debt Auctions Per Year
- 6.1. Inflation in Central America and the Western Hemisphere
- 6.2. Inflation in Central America, the Western Hemisphere, and Industrialized Countries
- 6.3. Legal Central Bank Independence before and after Reform
- 6.4. Legal Central Bank Independence, All Latin America
- 6.5. Central Bank Reform and Inflation in Central America
- 6.6. Inflation and Legal Central Bank Independence in Latin America, 2000–03
- 6.7. Inflation and Legal Central Bank Independence in Latin America, 2004–05
The following conventions are used in this publication:
- In tables, a blank cell indicates “not applicable,” ellipsis points (…) indicate “not available,” and 0 or 0.0 indicates “zero” or “negligible.” Minor discrepancies between sums of constituent figures and totals are due to rounding.
- An en dash (–) between years or months (for example, 2005–06 or January–June) indicates the years or months covered, including the beginning and ending years or months; a slash or virgule (/) between years or months (for example, 2005/06) indicates a fiscal or financial year, as does the abbreviation FY (for example, FY2006).
- “Billion” means a thousand million; “trillion” means a thousand billion.
- “Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).
As used in this publication, the term “country” does not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.
There is substantial optimism about Central America’s investment and growth potential, reflecting continuing political and economic stability, and deepening global and regional integration to achieve sustainable employment growth and poverty reduction. This optimism has already led to increased investment in the region, and was echoed by a diverse group of investors who, at a High-Level Conference on Investment on February 1–2, 2007, in Costa Rica, expressed a strong interest to start or expand operations in Central America.
Given the increased international focus in Central America, policymakers have an opportunity to make the region even more attractive for investment by accelerating reforms to reach higher levels of economic growth and by fostering integration. These issues are at the center of this publication, which highlights the region’s progress and discusses—in light of the international experience—a number of key areas where further reforms are needed. International experience reveals, for example, that strengthening institutions and improving the business environment can substantially improve Central America’s growth potential, and thereby reduce still-high levels of poverty. It also argues that there is substantial scope to further develop capital markets, which would not only improve access to financing and facilitate growth but also reduce vulnerabilities and strengthen the effectiveness of monetary policy. Additional important topics covered in this publication include pension reform, monetary policy frameworks, and sovereign debt structures.
As Central America advances, the IMF will continue to assist the authorities in their reform efforts through policy advice and technical assistance with the aim of improving the living conditions of all citizens.
Rodrigo de Rato
International Monetary Fund
Central America is moving forward with its integration efforts. Clear indications of this are the free trade agreement between the United States, Central America, and the Dominican Republic (CAFTA-DR), the initiation of negotiations on a partnership agreement with the European Union, and increasing integration among the Central American economies, including the establishment of a customs union. However, these efforts need to move hand-in-hand with reforms in other areas to ensure that the benefits of integration materialize and that the region is in a better position to face adverse shocks.
This publication covers a number of policy priorities, including measures to increase the region’s growth potential to narrow the income gap with more developed countries, ensure the sustainability of public pension systems, improve the structure and functioning of public debt markets, and increase the effectiveness of monetary policy. The currently benign global environment provides a unique opportunity for policymakers in the region to press ahead with these reforms.
This publication is the second volume on Central America coordinated by our team in the Western Hemisphere Department and reflects our increased focus on issues that are common across countries or directly related to Central America’s integration process.
Director, Western Hemisphere Department
International Monetary Fund
Reflecting our increased focus on cross-country issues and topics related to integration, this is the second publication on Central America produced by the IMF’s Western Hemisphere Department, complementing Occasional Paper 243. The production of this publication is the result of a team effort that included staff from a number of departments led by Dominique Desruelle and Alfred Schipke.
The authors would like to thank Anoop Singh and David Robinson for their comments and guidance. The authors would also like to acknowledge the comments and suggestions from the Central American authorities and the participants at the Fifth Annual Regional Conference on Central America, Panama, and the Dominican Republic in Punta Cana (June 28–29, 2006).
Special thanks go to Carmen Sanabia, who worked extremely hard to ensure the timely submission of the manuscript. Also, the authors would like to thank Cleary Haines and Ewa Gradzka for their outstanding research support. David Einhorn of the External Relations Department coordinated production of the publication.
The opinions expressed in this paper are solely those of its authors and do not necessarily reflect the views of the International Monetary Fund, its Executive Directors, or the authorities in the respective Central American countries, Panama, and the Dominican Republic.