Progress and Problems in U.S. Aid to the Economic Unification of Central America

B-169350: Published: Aug 13, 1970. Publicly Released: Aug 13, 1970.

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Since about 1950 Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua have been working toward economic unification. Objectives are to eliminate barriers to free trade, to develop common external tariffs, and to balance industrial development, including a free flow of capital and labor among the five countries. From July 1961 through the beginning of 1970, the Agency for International Development (AID) has budgeted about $143 million and has paid out $67 million for aid designed to accelerate the economic unification of Central America. AID's Regional Office for Central America and Panama, established in 1962, to encourage and support the Central American Common Market, is responsible for this program. Panama is not a party to the unification plans. This program is part of a larger economic assistance program to the five countries. Total external assistance was about $1.3 billion during the 8-year period. This is equal to about 31 percent of domestic revenues of the five countries, or about 20 percent of the export earnings. The United States provided about $1,017 million, or about 78 percent of the total external assistance. Because of congressional interest in multicountry economic development and the amounts of U.S. monies involved, the General Accounting Office (GAO) reviewed AID's efforts to help accelerate economic unification of Central America.

The Central American Common Market is recognized by a number of authorities as the most successful attempt to date at economic unification among developing countries. However, achievement of a common market that is fully effective may be some time away. It includes a customs union (abolishment of tariffs among the member); comparable external tariffs; and free movement of labor, capital, and business owners between the countries. The customs union has been successfully established by the five countries but levels of external tariff protection constitute a major unresolved problem, and elimination of barriers to the free movement of people and capital within the area has been limited. Since its establishment in 1960, the Common Market has expanded domestic markets through removal of about 95 percent of the restrictions on trade between the five countries. Internal trade has increased on the average of 30 percent a year, from $33 million in 1960 to $259 million in 1968. Outside trade also increased on the average of 9 percent a year. Trade with the United States--Central America's most important customer and supplier--increased in dollar value but declined in percentage-terms as a part of Central America's total imports and exports. Increased trade has come from economic unification, but it has also heightened nationalistic feelings among the five countries--especially aggravated since 1968 because of increasing imbalances in area trade. Also an uncertainty about the Common Market's future has occurred because of the 4-day war between Honduras and El Salvador in July 1969. As a result of the war, the Honduras portion of the Pan American Highway was still blockaded to Salvadoran products as of June 1970. Economic problems currently facing the area include: (1) questions on the level of tariff protection allowed to industry, (2) balance-of-payments difficulties, and (3) limited markets.

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