A New Way of Thinking About Foreign Investments into Central America

The Private Secretary of the Presidency, Héctor Zelaya, indicated somewhat recently that 180 million dollars will be invested into the textile sector (“maquila”) of Honduras. Mentioning in a tweet that “#LoQueVieneEsImportante” meaning “what’s coming is important”, implying that this investment is something good for the country since more employment would be generated. This may seem true at first glance, but unfortunately, this type of investments into the country is not new. Nor is it new for Northern Central America (Guatemala, El Salvador, Honduras). Historical FDI charts, and other data, tell us that this is basically the only type of significant investments flowing into the region for several years; and the maquila sector, like other traditional sectors, is no longer the vehicle for development they once were for countries. This does not mean that we should stop investing in these sectors, but that investments need to start being pushed into an array of new products and services beyond what these countries currently offer. Towards products and services that are incrementally more complex, that provide better jobs, and hence improve the lives of the Central American people.

tweet from private secretary
Source: Twitter

Economics tells us that generating employment through industrial sectors such as the maquila is good for economic growth. This was sharply perceived during the 70s and 80s where these sectors served to generate wealth in several countries, particularly in Asia. Unfortunately for Central America, the global context has changed since then: virtually all countries produce textiles and agriculture. Global competition no longer allows a country to sustain social and equitable growth supported solely by these industries. Yet, this mistaken belief persisted in the minds of many, and certainly true in Northern Central America. Let’s continue with the case of Honduras, though the same reasoning applies to both Guatemala and El Salvador. For decades, maquila and manufacturing have been the dominant sources of production. Not great as the income it brings to the country has been in decline from about 33% of GDP in 2000 to 15% in 2020 (author’s analysis using data from the Central Bank).

Graph of Honduras historical exports by sector
Source: Atlas of Economic Complexity – CID, Harvard

This is not in the best interest of the country since economic development is driven by a diversification into new products and services that are incrementally more complex, bringing along better jobs and increased human capabilities and opportunities. Since 2004, Honduras has added only 27 new products to its export basket, contributing just $35 of per capita income in 2019 (18 new products for El Salvador and 17 for Guatemala, contributing $17 and $44 per capita income, respectively). We have focused so much on helping the development of the maquila, for diverse reasons, that we have lost sight of supporting other industries and companies in the country, particularly SMEs. The same Private Secretary, Héctor Zelaya, commented that “the main goal we have as a Government is the reduction of poverty and the main challenges are to generate the conditions for the legal security that private companies demand so that they invest and help us reduce poverty.” This is necessary, but the reality is that few concrete actions have been seen to actually support companies that are outside the economic (or special) development zones.Sadly, this is not the first government to promote foreign direct investment into the maquila sector, every previous government in Honduras has done so. As an example, the government of Juan Orlando Hernández managed to do the same when the “They signed an agreement with the maquila to generate 15,000 jobs with an investment of 410 million of dollars.” Clouding these thoughts, if one were to only look at the numbers, one would come to the conclusion that the previous government did a good job in attracting investment in the maquila:

Tweet from former president
Source: Twitter
FDI by Industry
Source: Author’s creation using Central Bank Data

Looking at the current situation of the country, it becomes clear that foreign investment into these sectors has not been enough to improve the socioeconomic conditions of the population, nor will it be. To highlight this further, the growth that we have seen has not been enough to close the gap that exists between us and that of rich countries. For example, the relative income of Honduras with that of the United States of America declined in the eighties and since then we have not been able to improve this situation. This is also true for El Salvador and Guatemala, we cannot seem to catch up.

Relative income of Northen CA countries to that of the US
Source: Author’s creation using World Bank data.

The most egregious mistake is that instead of changing the way of looking at investments into Central America, many of us continue to do the same thing that was done been done in the past: continue to believe that pouring money into traditional sectors will help spur growth and curb migration. And rather than looking at creative new ways to invest, in a smart and strategic way, we continue to put resources into these sectors just because we know it is possible, and because it is safe to do so.  The harsh reality is that, without making continuous efforts into new and interesting products and services, little will be achieved in terms of the development of the country.

Given the situation we are in, what can be done? I will offer a few ideas to serve as a guide:

  • Let’s recognize that the traditional sectors will not be the promoters of the socioeconomic development that we want for the countries. This does not mean that we should stop investing in them, but the focus of foreign direct investment should not be solely to generate massive employment, but rather to diversify the basket of products and services these countries offer. To take it a step further, investment in these sectors should have a slight shift, which leads me to the second point.
  • Let’s not only think about generating employment, but about generating good jobs that will bring better conditions to people. Likewise, let’s think about how to improve the working conditions of existing jobs. Yes, it is true that the maquila generates massive employment, but it is important to understand that there is a difference between a job and a good job that is worthy of a human being. The reality is that working in a maquila does not provide the best conditions for people, the recent strike at Gildan is an indicator of this.
  • We must transition into other industries, so let’s take purposeful and strategic bets to promote growth in other sectors. There are lots of opportunities to invest in SMEs, much more than the average person believes it to be. Bahlam has already identified over 50 promising firms in various industries across Northern Central America, and we aim to spur growth in these firms.

None of this is easy, but we have to start somewhere. Staying stuck promoting maquila, call centers, and special development zones will not bring equitable growth for the countries. It will only further promote an increase in inequality, leading to further out-migration.

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