The Private Secretary of the Presidency, Héctor Zelaya, indicated somewhat recently that USD 180 MM would be invested into the textile (or “maquila”) sector of Honduras. Posting the following hashtag in a tweet: “#LoQueVieneEsImportante” which translates to “what comes is important”. Implying in his tweet that this investment will [move Honduras forward]. The reality is that these type of investments into the country, and the broader Central American region, are anything but new; nor have they produced the economic outcomes often touted. Historical FDI data shows that investments into the maquila sector are virtually the only type of significant capital flowing into the region. Unfortunately, the maquila sector is no longer the vehicles for development it once was. This doesn’t mean that we should stop investing in traditional sectors, but it highlights the need to start investing elsewhere, specifically into an array of new products and services that push the region’s commercial and production frontier. Incrementally more complex industries provide better jobs and improve the lives of the Central American people.
Economics tells us that generating employment through industrial sectors such as the maquila is good for economic growth. Perhaps the best example of this is the rapid growth between the 1970s-90s of several Asian countries (known as “the East Asian miracle”). Unfortunately for Central America, the global context has since then changed significantly. Virtually all countries produce textiles and agriculture, meaning that global competition no longer allows a country to sustain social and equitable growth supported solely by these industries. Yet, this mistaken belief persists in the minds of many, and certainly rings true when people currently think about how to drive for economic development in Northern Central America.
Let’s continue with the case of Honduras (though the same reasoning applies to Guatemala and El Salvador). For decades, maquila and light manufacturing have been the dominant sources of production and exports. Not a great situation as the income it brings into the country has been in decline: representing about 33% of GDP in 2000 down to 15% in 2020 (author’s analysis using data from the Central Bank of Honduras).
Continuing to push for investments solely into these sectors, and hoping for things to change, is not in the best interest of the country. 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. Central America has not focused on this diversification. Since 2004, Honduras has only added 27 new products to its export basket, contributing just $35 of per capita income (18 new products for El Salvador and 17 for Guatemala, contributing $17 and $44 per capita income, respectively). We have focused so much on developing the maquila sector that we have lost sight of supporting other industries. Unfortunately, this isn’t the first government to promote foreign direct investment into the maquila sector, every previous government in Honduras has done the same. For example, former president Juan Orlando Hernández tweeted an eerily similar message when his administration signed an agreement with the maquila to generate 15,000 jobs with an investment of USD 410 MM.
Looking at data from the countries, it’s quite clear that foreign investment into these sectors has not been enough to improve the socioeconomic conditions of the population, nor will they be. To highlight this further, the growth that we have seen has not been enough to close the gap that exists between us and those of rich countries. For example, the relative income of Northern Central America with that of the United States of America declined in the eighties and hasn’t been able to catch up since then:
To begin closing the income gap, Central American leaders need to think of creative ways to invest and foster new industries and players. How can we do this? I’ll offer a few starting ideas:
- Let’s recognize that traditional sectors are no longer the drivers of the socioeconomic development in the region. This does not mean that we should stop investing in them, but the focus of foreign direct investment should not be geared or tailored to these industries. We should look into diversifying the basket of products and services these countries can 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 think only about generating employment, but about generating good employment that brings about better conditions for workers. Yes, it is true that the maquila generates massive employment, but it is important to understand that there is a difference between any job and a good, sustainable job. The reality is that working in a maquila does not provide the best conditions for people, the strike at Gildan is an indicator of this (Note: Gildan shut down operations in Honduras after I first wrote this post back in early 2023).
- 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 300 promising firms in various industries across Northern Central America, and continue to find attractive and scalable businesses every day.
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 region. It will only further promote an increase in inequality, leading to further out-migration.
